As property values soar and tax allowances remain frozen, more families are turning to gifting strategies to shield their estates from inheritance tax.
But without proper legal planning, gifting your home could create more problems than it solves: including surprise tax bills and HMRC intrigue.
Approximate Reading Time: 4 minutes
Topics Discussed:
- Legal and tax implications of gifting property, including IHT, CGT, SDLT, and care home means testing.
- How to structure property gifts legally to avoid tax pitfalls and protect your family’s future.
Why Gifting Property is Gaining Legal Momentum
With property often making up the bulk of an estate, gifting homes to children or grandchildren has surged.
In 2023 alone, over 152,000 properties were gifted, and that number is expected to rise to 220,000 this year.
The rise is linked directly to inheritance tax exposure.
While the IHT nil-rate band remains fixed at £325,000 (plus an additional £175,000 residence band if passed to direct descendants), rising property values have dragged many estates into the taxable zone.
Couples can combine allowances to shield up to £1 million from IHT. However, with no inflation-linked increases until at least 2030, many estates are now vulnerable.
The Legal Landscape of Gifting Your Home
Transfers to Spouses vs. Others
Passing a property to a spouse or civil partner upon death is exempt from IHT. But if your will leaves a property to someone else (such as an adult child) its full value is counted within the estate for tax purposes.
To gift a property during your lifetime and keep it out of your taxable estate:
- You must live for seven years after the gift.
- You must not continue benefiting from the property unless you meet strict criteria.
Failure to meet these conditions can trigger full IHT liability.
The Seven-Year Rule: Legal Clarity is Crucial
Known in law as a Potentially Exempt Transfer (PET), a lifetime gift of property becomes exempt from IHT only if the donor survives for seven full years.
If death occurs within that window, the gift is taxed on a sliding scale, tapering from 40% in year one to 8% in year seven.
Example:
A couple with a £1.3 million estate could save £120,000 in tax by gifting a £300,000 home early—provided all conditions are met and the gift isn’t later disqualified.
Common Legal Pitfalls to Avoid
Gifts with Reservation of Benefit
If you continue to live in the property without paying full market rent, HMRC can treat the gift as invalid for IHT purposes. This is called a “gift with reservation of benefit,” and the property will remain part of your taxable estate.
To avoid this:
- Pay documented, market-rate rent regularly.
- Ensure no other benefits are derived from the property post-gift.
Capital Gains Tax (CGT)
If the gifted home isn’t your primary residence, the transfer is a deemed disposal, triggering CGT on any increase in value since purchase. The recipient will inherit the market value at the time of the gift, affecting their own CGT liability if they sell later.
Stamp Duty Land Tax (SDLT)
Where a mortgage exists, SDLT may apply to the amount of outstanding debt transferred. If the recipient already owns another property, a 3% SDLT surcharge may apply.
Care Fees and Deprivation of Assets
Local authorities assess financial contributions for care based on your assets.
If a property is gifted shortly before needing care, the council may claim it was done to avoid fees: a legal issue known as deprivation of assets.
This can result in the gifted property being included in means-testing, negating any perceived advantage.
The Importance of Professional Legal Advice
Gifting property is not simply about handing over the keys. Deeds of gift, IHT planning, CGT assessments, and care fee implications all demand careful legal analysis.
Working with solicitors ensures:
- Proper structuring of gifts to comply with HMRC requirements.
- Timely documentation and rent arrangements to avoid reservation of benefit.
- Alignment with your will and broader estate plan.
Summary
Gifting property can be a powerful way to reduce inheritance tax, but only when legally structured with care.
From CGT and SDLT to the seven-year rule and deprivation of assets, there are numerous pitfalls that could compromise your intentions.
At Help Me Legal, we specialise in creating bespoke, legally compliant gifting strategies that protect both your assets and your heirs.
Contact Help Me Legal today at 01772 282768, fill in our contact form here, or reach out via our 24 hour WhatsApp at +447816848188.