Thinking about gifting a property to your kids? It’s something we hear a lot, especially from parents who’ve built up wealth in their home and want to help the next generation. But handing over a house isn’t as straightforward as it sounds. Between inheritance tax rules and tricky timeframes, a well-meant gift can come with an unexpected bill if you don’t plan it properly.
Let’s break down the common mistakes, smarter alternatives, and when to hold off.
5 Common Mistakes People Make When Gifting Property
1. Gifting it and still living there
This is one of the biggest traps. If you give your home to your children but keep living in it rent-free, HMRC sees that as a “gift with reservation of benefit”, which means it still counts toward your estate for inheritance tax (IHT). You either need to pay market rent or explore different structures.
2. Forgetting the 7-year rule
Many people know that gifts fall out of your estate if you live seven years after making them. But fewer realise that taper relief only applies to the tax due, not the value of the gift, and it only kicks in after year three. If you die within seven years, the full value may be pulled back into your estate. And if you’ve made other big gifts in the past seven years, that could affect the tax too (sometimes going back 14 years in total).
3. Overlooking capital gains tax (CGT)
If the property you’re gifting isn’t your main home, say, a buy-to-let, giving it away can still trigger CGT based on the market value at the time of the gift. For residential property, gains are taxed at 18% or 24%, depending on your income. You get a £3,000 annual CGT allowance, and if you do gift a property, HMRC needs to be notified within 60 days. This can be a costly surprise, especially if the property has risen significantly in value.
4. Not documenting the gift properly
You need a clear paper trail: legal title transfer, proper valuations, and ideally, professional advice. If HMRC challenges the gift, you’ll want evidence on your side.
5. Rushing in without a strategy
The emotional drive to help family can lead to quick decisions, but gifting property should fit within a bigger estate and tax plan. Sometimes, holding onto the asset or using a different method (like a trust or loan) is better long-term.
3 Tax-Efficient Routes That Could Work Instead
- Use a trust
Placing the property into a trust can give you more control over how and when it’s accessed, while still removing it from your estate (in some cases). It’s complex, but powerful when done right. - Sell at undervaluation with a formal plan
If gifting outright isn’t suitable, some choose to sell the property to a family member below market value, with the difference treated as a gift.
But HMRC still calculates CGT based on the full market value (because it’s a connected person), and if the buyer takes on a mortgage, Stamp Duty could apply too, even if no cash changes hands.
- Downsize and gift the proceeds
Sometimes the simplest solution is selling your home, buying something smaller, and gifting the leftover cash. You still have to consider the 7-year rule, but it avoids many property-specific complications.
Plus, if the home was your main residence, you may benefit from Private Residence Relief (PRR), which can reduce or eliminate CGT, especially if you’ve only recently moved out or are entering long-term care.
When It’s Better to Hold Off
If your estate isn’t large enough to trigger IHT, or if gifting would leave you financially stretched, it may not be the right time. And if you’re relying on that property for care costs or income, transferring ownership could backfire later. This is why professional advice is crucial.
Speak to Someone Before You Move the Deeds
Every family situation is different, and so are the rules. Before you gift a property, let’s talk through the tax angles, the timing, and how it fits into your overall wealth plan.
Call us on 020 8366 4400 or email enquiries@cedarhfs.co.uk to book a no-obligation review.