Is gifting an investment property to your children a good idea?

In this article was consider the practicalities and the tax implications of gifting investment property to children.

Parents who own a second property and want to reduce their inheritance tax (IHT) liability often suggest gifting their investment property to their children. In this article we look at some of the risks and tax implications you should consider when advising a client in this situation. To keep things simple, we’ve assumed that the children are adults and the property is a residential rental property and not one that the parents have ever lived in.

Practical considerations

First, we’ll look at the practical considerations:

• Understand why the parents want to make the gift. Is it to mitigate IHT on their death? Do the parents actually have an IHT problem? Is it to advance the children’s inheritance? Is it to relieve the parents from the burden of being responsible for the property? Is it to avoid paying for care? If the latter, give careful consideration to – among other things – the deliberate deprivation of assets rules.
• Are the parents comfortable giving the property away? Consider the extent of the gift in relation to the parents’ assets.
• Advise the parents to consider taking financial advice before making the gift and perhaps undertaking cashflow modelling with their financial planner to ensure that they can afford to give the property and its income away. Taking a holistic approach will determine if this is the best asset for the parents to gift.
• Make sure the parents are making the gift of their own free will and are not being unduly influenced into doing so.
• Take into account the age and health of the parents.
• Ascertain whether the parents have already made any gifts. l Consider whether the parents’ wills need to be updated following the gift.

The ‘what ifs’

Then there are the ‘what ifs’ to consider:

• If the gift is outright to the children, then once the parents have gifted the property it is outside their control and they can’t get it back. So they need to fully understand the risks involved and what can be done to protect against them.
• What if the relationship between the parents and a child changes and the parents regret the gift?
• What if a child gets divorced after the gift is made? Will the parents be unhappy if the child’s spouse brings a claim for a share of the property? If a child wants to protect the gifted property in the event of divorce, they can consider putting in place a pre- or post-nuptial agreement.
• What if a child becomes bankrupt?
• What if a child loses capacity? Should they make a lasting power of attorney?
• What if a child dies after the gift is made? Could the ownership of the property become fragmented? Does the child need to make or update their own will to ensure that the property passes to those intended?
• What if there are several children inheriting the property? This increases the chances of problems regarding divorce, bankruptcy, incapacity and death.
• What if the children disagree about issues concerning the property? Should a declaration of trust be put in place to record things like how the property is owned (for example, whether the beneficial interest is held as joint tenants or tenants in common), pre-emption provisions on sale and how income is divided, and how to meet the ongoing costs of managing the property?

Some of these problems can be overcome by making a gift into a trust rather than an outright gift, and you should advise the parents of the pros and cons of each.

Tax considerations

There are also several tax considerations. We first explore the capital gains tax (CGT) and IHT implications of an outright gift and then compare these with the implications of a gift into a trust. Finally, we look at the income tax implications, the anti-avoidance measures and stamp duty land tax (SDLT).

An outright gift:

Capital gains tax

In our example, the rental property has only ever been an investment property. The parents have never lived there, so principal private relief doesn’t apply. The gift of the property by the parents to their children triggers an immediate CGT liability for the parents on the difference between the market value at the date of the gift, and the amount they paid for it. They can deduct certain costs, such as the cost of capital improvements and legal fees, and they also have a tax[1]free annual allowance of £3,000 each. The balance is charged at 18% or 24%, depending on the parents’ own taxable income and gains for that tax year. The CGT needs to be reported and paid to HM Revenue & Customs within 60 days.

By gifting the property in their lifetimes, the parents lose out on the CGT free uplift to market value on their death but potentially save 40% on IHT. If CGT is payable, then it’s only payable at 18% or 24% on the taxable gain, not on the whole value of the property.

Inheritance tax

An outright gift of a property or a share of it by a parent to their children is a potentially exempt transfer (PET) for IHT purposes. A PET is initially exempt when made, but becomes chargeable if the person making the gift (so in our case, the parent) dies within seven years of doing so. If the parent survives seven years from making the PET, it’s completely exempt from IHT.

Only if the PET becomes chargeable does it use up all or part of the nil rate band for calculating the death tax on later lifetime gifts and the estate. Even if the value of the PET itself is within the parent’s nil rate band, because it’s accumulated with earlier transfers it may become liable to IHT if the earlier transfers have used up the nil rate band.

If the parent made chargeable lifetime transfers within seven years before the failed PET, then the deceased’s personal representatives need to look back over a period of 14 years to assess the parent’s cumulative total at the time of the PET. The value brought into account is the value at the date of the PET. This is advantageous if the value of the property has increased in value between the date of the PET and the date of the parent’s death.

Taper relief applies to reduce the IHT on PETs made within seven years before death if the person making the gift survives at least three years from the date of the gift. The tax due on a PET is payable by the donee of the gift (so in our case the children) within six months of the end of the month of death.

The advantage of an outright gift from an IHT point of view is that the amount the parents can gift is without limits, and provided they survive seven years (in most cases) from the date of the gift it falls out of account for IHT purposes in their estate, and no IHT is payable.

A gift into trust:

Capital gains tax

If the gain on the property was substantial and the parents are concerned about, or unable to pay, the CGT liability that arises in relation to an outright lifetime gift, then they can create a trust and defer the gain by claiming holdover relief. This enables the parents to make a lifetime gift of the property without incurring a CGT charge. This is useful, as the CGT liability on an outright gift is ‘a dry tax charge’: the parents have to pay the tax on the gain even though they haven’t received any sale proceeds with which to do so.

Inheritance tax

The downside of a trust, however, is that there’s a limit on the amount that can go into the trust without triggering an IHT charge. Most new lifetime trusts are within the relevant property regime. This means that a parent can gift up to the nil rate band – currently £325,000 – into a lifetime trust without incurring an immediate IHT entry charge. Parents can jointly settle up to £650,000 without an IHT entry charge. So, depending on the value of the property there may be no IHT to pay. The gift does, however, go on the parent’s seven-year IHT clock. A parent can gift assets worth more than £325,000 into a trust, but there’s a 20% IHT entry charge on the amount above their nil rate band if the trustees pay the tax, and 25% if the parent pays the tax.

If the parent dies within seven years of making the gift into the trust the transfer is reassessed at the death rate of IHT and credit is given for any lifetime IHT paid. Taper relief reduces any IHT payable if the death occurs more than three years after the transfer.

A relevant property trust also incurs tax charges every 10 years and exit charges when assets leave the trust. However, the maximum these charges can be is 6%, which is likely to be considerably lower than the rate of 40% IHT that can be charged on death.

Using life assurance to pay IHT

As lifetime gifts either outright or into trust remain in the parents’ estate for IHT purposes for several years, it’s worth the parents considering whether to take out life assurance to provide a lump sum, to ensure that funds are available to pay any IHT liability on their death. An example of an insurance policy is a term life assurance policy for seven years, which is useful given the short six-month period in which to pay IHT, especially if the children or the trustees of the trust have limited liquid assets to do so themselves.

Income tax

As the property is rented, there are also income tax considerations.

If the property is gifted outright to the children, then the rental income going forward belongs to them and they need to declare it on their own tax returns. They will be taxed on the rental income at their own personal rates of tax.

If the property is gifted to a trust, then the income tax regime depends on whether the beneficiary has a right to the income or not.

Anti-avoidance measures

The anti-avoidance measures also need to be considered to ensure that the gift is not caught by the gift with reservation of benefit rules or the pre-owned assets tax rules. In broad terms, to avoid these rules, the parents need to ensure that they don’t continue to benefit from the property once they’ve given it away.

Stamp duty land tax

SDLT doesn’t apply if there is no consideration for the gift of the property.

If the property is subject to a mortgage and the children take over the mortgage (assuming the lender agrees), then the amount of the loan is chargeable consideration and SDLT does apply.

If the property is subject to a mortgage, then the parents should consider repaying the mortgage so that SDLT doesn’t apply.

Summary

Early lifetime gifting of an investment property by parents to their adult children – either outright or into trust – is a good way to pass assets down a generation in a tax-efficient way, but the ‘what ifs’ and the tax implications of each option need to be carefully considered.

For further information, please contact info@theburnsidepartnership.com.

This article first appeared in Issue 170 February 2026 of PS, the magazine of the Private Client Solicitors Section.