Gifting Your Home?

30 June, 2025 5 minutes reading time

Understand the Tax Traps

Parents often consider gifting their home to their children during their lifetime. They hope to manage their estate and reduce future tax bills. However, this seemingly generous act involves complex tax implications, especially for Inheritance Tax (IHT) and Capital Gains Tax (CGT). Understanding these nuances is crucial to avoid unforeseen financial burdens for everyone involved.

The Inheritance Tax Minefield

When parents gift their home but continue to live in it, they often fall under the “Gift with Reservation of Benefit” (GROB) rule. The GROB rule is a key anti-avoidance measure from HMRC.

What is a GROB?

If you gift an asset but still benefit from it, HMRC treats the gift as if it never truly happened for IHT purposes. For a family home, this means that the property’s full value will still be considered part of the parents’ estate upon their death. This calculation applies regardless of how long ago the gift occurred, completely negating any IHT planning.

Can you avoid it?

One potential option for children to avoid the GROB rule while their parent continues living in the home is to pay a full market rent to their parents.  This rent must be genuine, commercially realistic, regularly reviewed, and adequately documented. The significant downside is that the children, as new owners, will be liable for income tax on this rental income. They also assume landlord responsibilities, such as gas safety checks and other maintenance tasks.

The Seven-Year Rule (for other gifts)

For gifts not subject to GROB rules (genuine outright gifts where the giver gives up all benefit), the “Potentially Exempt Transfer” (PET) rule applies. If the giver survives for seven years after making the PET, the gift becomes entirely IHT-exempt. If they die within seven years, the gift may become taxable. A tapering reduction in the tax rate applies if death occurs between three and seven years after an individual makes the gift. Importantly, the seven-year rule does not apply if GROB rules are engaged.

Capital Gains Tax

While parents might aim to avoid IHT, their children could face a significant CGT bill when they eventually sell the property. This scenario is especially true if the home was not the children’s principal private residence.

Principal Private Residence (PPR) Relief

Usually, selling your only or main home means any gain is exempt from CGT under Principal Private Residence (PPR) Relief. However, when parents gift their home to children, and the children do not live there as their primary residence, this relief typically doesn’t apply to the children’s later sale.

The Problem

For CGT purposes, the “gain” is the difference between the property’s market value when gifted to the children and its eventual sale price. If the property’s value significantly increases over the years the parent lives there (which is not uncommon), this gain can be substantial. Consequently, the children, as legal owners, become liable for CGT on this profit.

The ‘Trust’ Exception for PPR Relief

There is a less common but vital exception for PPR relief, especially when a property is gifted but a parent continues to live there: holding the property in a trust.

In certain circumstances, if a trust holds a property, and a beneficiary (such as a parent) has the right to occupy it as their primary residence under the trust’s terms, the trustees can claim PPR relief when they sell the property. This arrangement differs crucially from outright personal ownership. Key points to note include:

1. Types of Trusts

PPR relief applies to certain trusts. These trusts include “express trusts” (deliberately created, usually in writing, with clear intentions) or even “implied trusts” (which arise through legal principles, for example, based on financial contributions or shared intentions, even without formal documents).

2. Time Limit

Importantly, for PPR relief to apply in a trust context, the trustees must submit a claim to HMRC within four years of the end of the tax year when they sold the property. Failing to claim within four years from the end of the tax year of the sale typically means HMRC will reject it, regardless of the claim’s underlying validity.

Furthermore, trustees must actively claim PPR relief. This situation differs from individual owners, who often receive PPR relief automatically.

3. Evidencing the Trust

It’s vital to be able to prove a trust’s existence, especially an implied one. Possible evidence includes letters or the original solicitor’s paperwork from the transfer of the gift, which would show the parents’ continued right to occupy.

Other Important Considerations

Gifting your home is a significant decision with broader implications than just IHT and CGT. Consider these points:

1. Loss of Ownership

Once gifted, parents no longer own the property. They lose control over it. The property could also be at risk if the children face financial difficulties, divorce, or if family relationships deteriorate.

2. Care Home Fees

Local authorities can (and do) challenge gifts explicitly made to avoid care home fees under “deprivation of assets” rules.

3. Stamp Duty Land Tax

An outright gift with no money changing hands generally doesn’t trigger Stamp Duty Land Tax (SDLT). However, if children take over an outstanding mortgage or make a financial contribution, SDLT may be applicable. 

Our Advice

The complexities of gifting property to children highlight the absolute need for specialist legal and tax advice before any transfer happens. Relying on assumptions or incomplete information can lead to significant, unexpected tax liabilities and legal issues. A qualified legal professional and tax advisor can assess your specific situation, explain the intricate rules, and help structure the transaction in the most tax-efficient and legally sound way.

If you need advice or further information about gifting or other estate planning matters, such as wills or trusts, please don’t hesitate to contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

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