Gifting Property in the UK: Gifts, Trusts, and Inheritance Tax Explained
Case Study: Parent Owning a £600,000 Property
Situation
A parent in London owns a second property worth £600,000. They want to transfer it to their child to reduce future inheritance tax UK exposure. Two main routes are considered: making an outright gift or placing the property into a trust.
Option 1: Outright Gift
Steps
- A Deed of Gift is prepared and registered with HM Land Registry.
- If mortgage-free, no Stamp Duty Land Tax (SDLT) applies.
- The parent gives up all control over the property immediately.
Tax Consequences
Inheritance Tax (IHT) – this is treated as a Potentially Exempt Transfer (PET):
- If the parent survives 7 years, the property is excluded from their estate → no IHT.
- If they die within 7 years, IHT applies at 40%, reduced by taper relief after 3 years.
Capital Gains Tax (CGT):
- Payable on any gain at the time of transfer.
- Example: bought at £300,000, now worth £600,000 → £300,000 gain → taxed at 18% or 28%.
Advantages: simple, low-cost, tax-efficient if parent survives 7 years.
Disadvantages: no control, immediate CGT liability, property vulnerable if child divorces or has debts.
For more insights on lifetime giving, see Donation in English Law: Legal Framework, Tax Implications.
Option 2: Transferring the Property into a Trust
Steps
- Parents create a discretionary trust or life interest trust.
- Property is transferred to the trust, managed by trustees.
- Conditions can be set (e.g., a child receives rental income only after turning 25).
Tax Consequences
Inheritance Tax (Relevant Property Regime):
- First £325,000 exempt under the nil-rate band.
- Remaining £275,000 subject to a 20% entry charge → £55,000 due immediately.
- The trust faces 10-yearly charges (up to 6%).
Capital Gains Tax (CGT):
- Normally due on transfer.
- But hold-over relief under s.260 Taxation of Chargeable Gains Act 1992 may defer CGT until the asset is sold.
Advantages: control retained via trustees, asset protection from creditors or divorce, flexible rules for children.
Disadvantages: higher cost, complex ongoing tax regime, IHT entry charge above the nil-rate band.
For practical comparisons of gift vs trust, see Trusts vs Wills: Why Trusts Are the Smarter Choice in Estate Planning.
Gift vs Trust – At a Glance
| Feature | Gift | Trust |
| Immediate Tax | CGT (if gain realised) | CGT (deferred via hold-over relief) + IHT entry charge |
| IHT after 7 years | Excluded from estate | Still subject to 10-year trust charges |
| Control | None – child owns outright | Retained via trustees |
| Costs | Low | High (set-up + ongoing fees) |
| Asset Protection | None | Yes (creditors, divorce, minors) |
Key Legislation
- Inheritance Tax Act 1984 – s.3, 3A (PETs), s.102 (Gift with Reservation of Benefit), Part V (Relevant Property Regime).
- Taxation of Chargeable Gains Act 1992 – s.260 (hold-over relief).
- Trustee Act 2000 – trustee duties and powers.
Finance Act 2006 – major reforms to trust taxation.
Can a Donor in England Retain Use of Gifted Assets?
Yes – but it falls under Gift with Reservation of Benefit (GROB) rules.
When a GROB Applies
If a donor gifts property but keeps using it (e.g., living rent-free), HMRC counts it as part of the estate at death.
Structuring Options
- Outright Gift – donor gives up all benefit. After 7 years, property excluded from estate.
- Gift + Paying Rent – donor continues living there but pays full market rent. PET rules apply, but rent is taxable income for the child.
- Life Interest Trust – donor retains right to live in the property or receive rent, with asset passing to beneficiaries on death. Tax falls under the Relevant Property Regime.
For further real-life applications, see Do You Really Need a Will? 5 Real-Life Stories.
Example: Property Worth £500,000
- Scenario 1: Outright Gift – no further use; after 7 years → outside estate.
- Scenario 2: Gift with Reservation – father gifts house but lives rent-free; HMRC counts it as part of estate → £70,000 IHT liability.
- Scenario 3: Gift + Rent – father gifts house but pays daughter market rent; excluded from estate after 7 years. The daughter must pay income tax on rent.
- Scenario 4: Life Interest Trust – father keeps living rights or rent income; property passes automatically to beneficiaries after death; subject to trust charges.
Conclusion
Gifting property in the UK can help reduce IHT, but the right approach depends on family needs, control, and long-term planning. Outright gifts are simple and effective if the donor survives 7 years but remove all control and may trigger CGT. Trusts preserve control and protect assets but involve higher costs and complex taxation.
Families must weigh gift vs trust carefully, considering risks of Gift with Reservation of Benefit (GROB). Professional advice is strongly recommended when making substantial estate planning decisions.
Notice: All names in these examples have been changed to protect confidentiality.
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References / Sources
- Inheritance Tax Act 1984 – legislation.gov.uk
- HM Revenue & Customs, Inheritance Tax: Gifts and Potentially Exempt Transfers
- HM Revenue & Customs, Trusts and Inheritance Tax
- HM Revenue & Customs, Gift with Reservation of Benefit
- Taxation of Chargeable Gains Act 1992
- Trustee Act 2000
- Finance Act 2006
