Parents, and grandparents, who are financially able, may want to help their children or grandchildren in stepping onto, or up, the property ladder. This could involve giving money to buy a property or gifting a property, either for the child/grandchild to live in or to rent out as an additional income source.
In this article we look at what you should consider if you’re thinking about gifting property to children. It’s a complex area and the tax treatment of any gift must be considered ‘in the round’ rather than focusing on individual taxes. As always, we recommend that specialist tax and legal advice is sought regarding individual circumstances before taking any action.
Can a child own property?
The age of the child receiving the property is important. Children under the age of 18 (16 in some circumstances in Scotland) cannot legally own land and property in their own name. Instead, property is usually held under either a ‘bare trust’, with an adult acting on the child’s behalf, or under a more formal trust structure. A formal trust is a legal entity in its own right and you can be a trustee and keep some control over the assets. Under a bare trust, the asset and any income net of tax is legally the child’s asset and once aged 18 they’re able to deal with it as they wish, without parental consent.
Capital gains tax for gifted property
Capital gains tax (CGT) may be payable on a gift of property or when property is sold at less than its market value. CGT is charged on any profit arising, or treated as arising, on the gift.
If you gift a property to your child or grandchild, CGT is charged on the difference between the market value of the property at the date of the gift and the amount you paid for the property. You can also deduct money you’ve spent on some capital improvements to the property and any associated costs of the purchase or gift, eg Stamp Duty Land Tax, legal fees and estate agent’s fees.
The first £3,000 of gain is tax-free under the CGT annual exemption (provided you haven’t already used it) and the balance is charged at 18% or 24%, depending on your income for that tax year (assuming the property is residential).
If you buy the property and gift it straight away there should be no gains to tax, provided there’s no increase in value between the dates of purchase and gift.
If the property you gift was your only or main home, Private Residence Relief (PRR) may exempt some or all of the gain from CGT. And if your child/grandchild lives in the property as their only or main residence, they may also qualify for PRR when they come to sell the property.
Where there’s CGT to pay, the gift of the property must be reported to HM Revenue & Customs (HMRC) and the tax paid within 60 days.
Inheritance tax planning
Inheritance tax (IHT) is charged on an individual’s estate (property, money and possessions) when they die. IHT is generally charged at 40% of the estate value above £325,000 (or £500,000 where a main residential property is passed on death to a direct descendant and the total value of the estate is less than £2 million). Therefore, it can be good planning to gift excess assets during an individual’s lifetime to reduce the value of the remaining estate. There are, however, a few traps to watch out for regarding lifetime gifts.
If you make gifts, including property, to individuals during your lifetime they are only exempt from IHT if you survive seven years from the date of the gift. If you survive for at least three years, but less than the full seven years, a tapered IHT rate applies. However, if you retain an interest in the property, it’s treated as a ‘gift with reservation of benefit’ and the property remains in your estate and is taxed in full on death. Therefore, if you want to gift your family home to children and continue to live in it, you would have to pay the children full market rent to remove the property from your estate. The children may also be subject to income tax on the rent received.
Gifts made to trusts are subject to an immediate IHT charge of 20% where the value of the gift is more than the available nil rate band of £325,000. However, the nil rate band is refreshed every seven years, meaning that significant gifts can be made free from IHT during an individual’s lifetime.
Income tax on property income
Gifting rental property that produces an income to children can be a good way to use their income tax personal allowance and their lower tax rate bands. However, if you gift assets to your children who are under 18, any net income over £100 per year is taxed on you as if you still owned the asset. This rule doesn’t apply to income generated from gifts from grandparents.
Gifting away an income stream can have other implications for you, as you’ll be reducing your own income. Which, for example, may affect pension contribution limits or your own mortgage conditions.
SDLT on gifted property
Stamp Duty Land Tax (SDLT) applies on property transactions over a certain price in England and Northern Ireland. Where a property is gifted SDLT is charged on the value of any outstanding mortgage transferred with the gift. This means that if you buy property to gift to children SDLT could be charged twice. First on you when you buy the property and then on the children when you gift the property (if there’s a mortgage on the property). The SDLT nil rate band for residential properties is £125,000 (from 1 April 2025), after which SDLT is charged at increasing percentages depending on the value of the property or mortgage.
There are similar tax charges for land in Scotland where the Land and Buildings Transaction Tax threshold is £145,000 for residential property, and in Wales where the Welsh Land Transaction Tax threshold is £225,000 for residential property.
Other considerations
If your gift is to adult children, the property is immediately outside your control and therefore, if gifting part or all of the family home, it’s important to consider the longer-term effects of divorce or bankruptcy within the family, which can result in the loss of the property.
If you gift assets or income, including property, so that they won’t be included in the financial assessment for care home fees, local authorities may still include the value of the assets even though you no longer own them.
Alternative options to gifting property to children
Depending why you want to gift a property, you may be better gifting post-tax rental income instead. That way you still retain ownership and control of the asset and it can be an opportunity to involve an adult child in the running of the rental property.
Alternatively, a proportion of the property could be gifted to an adult child, which, while still subject to the tax issues above, could provide an income stream in proportion to their share of the property.
What next?
Before taking any action, you should get specialist tax and legal advice based on your individual circumstances.
You may also be interested in our Gifting property – tax implications podcast and Gifting money to grandchildren article.
For tax advice, please talk to your usual Saffery contact or get in touch with us using the form below.
