Donation in English Law: Legal Framework, Tax Implications, and Recent Developments

By Natalie Popova, Legal Consultant | Express Law Solutions

Disclaimer: This article is for general information only and does not constitute legal advice. For specific guidance, contact Express Law Solutions.

1. Definition and Legal Nature of Donation

In English law, a donation is a voluntary, gratuitous transfer of property or rights from one person (the donor) to another (the donee), without consideration or expectation of material benefit. The defining feature of a donation is its gratuitous nature: the donor relinquishes ownership or rights purely for the benefit of the donee.

Legally, a donation is often treated as a gift, a concept recognised under common law. While donations may resemble unilateral contracts, they are not generally enforceable unless executed according to the proper legal formalities. Beyond private transactions, donations are also instruments of social policy, promoting altruism and supporting charitable activity.

2. Legal Framework in England and Wales

The regulation of donations in English law stems from several key legal sources:

  • Common Law Principles – requirements of intention, delivery, and acceptance.
  • Law of Property Act 1925 and Trusts of Land and Appointment of Trustees Act 1996 – governing donations of land and property.
  • Charities Act 2011 – regulating charitable donations and establishing tax reliefs.
  • Wills Act 1837 – relevant to donations made by testamentary disposition.

For a broader perspective on related legal instruments, see Do You Really Need a Will in England and Wales?

3. Classification of Donations

Donations under English law can be classified in different ways:

  • By Subject Matter:

    • Movable property (e.g., cash, shares, personal items).
    • Immovable property (e.g., land, buildings, rights in land).
  • By Timing of Transfer:

    • Inter vivos gifts – made during the donor’s lifetime.
    • Testamentary gifts – made through a will, effective after death.
  • By Form:

    • Simple gifts – verbal, written, or implied, provided delivery is effective.
    • Gifts requiring formalities – e.g., land transfers, requiring deeds under the Law of Property Act 1925.

4. Requirements for a Valid Donation

A valid donation in English law requires:

  1. Donative Intent – a clear intention to make a gift.
  2. Delivery or Transfer – either actual or constructive delivery of property.
  3. Acceptance – the donee must accept, expressly or impliedly.

Transfers of land require strict compliance with s.52 of the Law of Property Act 1925, including execution of a deed and registration with the Land Registry.

5. Gifting Property and Inheritance Tax Risks

For many families, the family home is the most significant estate asset. A frequent question is: Can I transfer my home to my children to minimise inheritance tax (IHT)?

While appealing, the reality under UK tax law is more complex. Poorly structured transfers can expose beneficiaries to IHT liabilities and family disputes. Understanding the inheritance tax UK framework is critical before gifting substantial assets.

6. Gifts and the Seven Year Rule

Under the Inheritance Tax Act 1984, lifetime gifts are treated as Potentially Exempt Transfers (PETs):

  • Survival beyond seven years – the asset is excluded from the estate.
  • Death within seven years – the asset may incur IHT, with taper relief applied under sections 6–7 of the Act.

7. Gift with Reservation of Benefit (GROB)

Problems arise when donors retain benefits post-transfer. If a donor gifts their home but continues living rent-free, HM Revenue & Customs (HMRC) may apply Gift with Reservation of Benefit (GROB) rules:

  • The property remains in the estate for IHT purposes.
  • PET exemptions are invalidated.
  • Beneficiaries may face a 40% IHT charge above the £325,000 nil-rate band.

8. Avoiding GROB: Practical Strategies

  • Complete Vacatur – donor leaves the property; the PET rule applies.
  • Paying Market Rent – donor stays but pays rent (children taxed under income tax rules).
  • Transfer into a Trust – use of discretionary or life-interest trusts. However, such trusts fall under the Relevant Property Regime of the Inheritance Tax Act 1984, triggering:
    • Entry charges (up to 20% above the nil-rate band).
    • Ten-year charges (up to 6%).
    • Exit charges on distributions.

Gift vs Trust – Key Comparison

Feature Gift Trust
Control The donor loses full control – the asset immediately belongs to the recipient. The settlor can retain some control through terms in the trust deed and by appointing trustees who manage the assets.
Use of the Asset If the donor continues to benefit from the asset (e.g., living in a house they gifted), it is considered a “gift with reservation of benefit”, and tax advantages may be lost. The trust can be structured so that benefits are preserved for specific people or periods (e.g., investment income goes to parents, while the capital passes to children).
Taxes (Inheritance Tax – IHT) – If the donor survives 7 years → the asset is outside their estate.  – If the donor dies within 7 years → taxed according to taper relief scale. – Most trusts fall under the Relevant Property Regime (Inheritance Tax Act 1984):  – Up to 20% entry charge on large gifts above the nil-rate band (£325,000).  – 10-year periodic charge (up to 6%).  – Exit charge when assets are distributed.
Flexibility Low – the recipient can do whatever they want with the asset. The donor cannot impose conditions. High – trusts allow complex arrangements: when and how beneficiaries receive assets, protection against creditors, divorce, and other contingencies.
Protection Low – if the recipient has debts, creditors can seize the asset. High – the asset remains in the trust. Beneficiaries have a right to benefits, but not full ownership, shielding the asset from claims.
Suitable for Small or simple transfers (cash gifts, birthday presents, passing a second property to a child). Larger estates, family wealth planning, cases with minor children, or complex family circumstances.

For deeper analysis, see Trusts vs Wills: Why a Trust May Be the Smarter Choice in Estate Planning.

9. Illustrative Example

Case Study: Mr. Smith gifts his £500,000 home to his daughter but continues to live rent-free. HMRC deems the house part of his estate due to GROB.

  • Estate nil-rate band: £325,000.
  • Taxable value: £175,000.
  • IHT at 40%: £70,000 liability.

Had he vacated or paid market rent, and survived seven years, the gift could have been free of IHT.

10. Gift vs Trust

When comparing gift vs trust, the legal and tax implications differ substantially:

  • Gifts – outright transfers, simple but irrevocable, subject to PET rules.
  • Trusts – complex, allow settlors to retain control, but exposed to ongoing charges.

Trusts provide asset protection and flexibility, whereas gifts are straightforward but risk exposure to HMRC reclassification.

11. Charitable Donations and Tax Relief

Donations to registered charities are exempt from IHT. Leaving at least 10% of the net estate to charity reduces the IHT rate on the remainder from 40% to 36%.

12. Recent Developments

Reforms are under consideration by the UK Government. According to HM Treasury Reports (2022), proposals include:

  • Lifetime caps on tax-free gifts.
  • Amendments to or abolition of the seven-year rule.

These developments may significantly impact estate planning strategies.

13. Conclusion

Asset transfers, whether through gifts or trusts, are powerful estate planning tools. Donations in English law offer simplicity but expose families to GROB pitfalls. Trusts, while complex, provide flexibility and protection, though subject to IHT regimes.

Families seeking to minimise inheritance tax UK burdens should weigh gift vs trust options carefully and consult professional advisers. Strategic planning ensures wealth is safeguarded across generations and charitable goals achieved.

Need help? At Express Law Solutions, we review, draft, and negotiate contracts to ensure they’re fair, clear, and enforceable.

Contact Us: +44 7482 928014 | expresslawsolutions@gmail.com or Book A Conslultation
www.expresslawsolutions.com

References / Sources

Add a Comment

Your email address will not be published. Required fields are marked *