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Tax considerations when gifting residences

By Daniel Barratt

  • Financial Planning

Inheritance Tax, often dubbed the “voluntary tax,” has long been a subject of debate and strategic planning among UK residents. With careful financial planning, it’s possible to manage and mitigate the impact of this tax. However, one common misconception that can lead to unintended consequences is gifting one’s main residence to children without fully understanding the associated tax implications. In this article, we’ll delve into the complexities of this practice, explore the concept of “gift with reservation”, and shed light on the capital gains tax implications, which can catch many individuals off guard.

The voluntary nature of inheritance tax:

In the UK, Inheritance Tax is frequently regarded as a voluntary tax due to the array of legally permissible strategies to minimise its impact. Through prudent estate planning, individuals can ensure that more of their hard-earned assets are passed down to their loved ones, rather than to the taxman. However, one situation often overlooked involves gifting one’s primary residence to their children. As a financial planner, I often work with clients who are keen to understand the implications of Inheritance Tax on their situation and start to use some of the legally permissible strategies. Whilst other professionals will be required, a financial planner will not just focus on Inheritance Tax, but also look at how the actions taken will interact with retirement planning and long-term care.

Gift with reservation: The unseen pitfall

Many people are unaware that gifting your main residence to your children without paying a fair market rent can trigger what is known as a “gift with reservation” under UK tax law. This means that the gift is incomplete because you, as the donor, continue to benefit from or reside in the property. Consequently, the property remains within your estate for Inheritance Tax purposes, defeating the primary objective of reducing your taxable estate through gifting.

To ensure that the gift is effective and does not fail, paying a fair market rent is essential if you intend to continue living in the property after the transfer. Failing to do so can result in the property remaining fully subject to Inheritance Tax upon your death.

Capital gains tax implications:

In addition to the potential Inheritance Tax liabilities associated with gifting your main residence, another tax consideration that often surprises individuals is capital gains tax (CGT). When you gift a property, CGT is calculated based on the increase in the property’s value from the date of the gift to the date of your death.

This means that not only could your children be liable for Inheritance Tax, but they may also face a substantial CGT bill if the property has appreciated in value over the years. The combined impact of these two taxes can significantly reduce the intended benefit of transferring your residence to your heirs.

Managing the tax implications:

To navigate the complexities of gifting a main residence, while minimising tax liabilities, seeking professional advice from tax experts and estate planners is crucial. They can help you develop a comprehensive strategy considering Inheritance Tax and CGT implications.

One potential solution to mitigate these tax consequences is establishing a trust, such as a discretionary or a property trust, which can offer greater flexibility and control over the property’s disposition while reducing tax exposure. However, these strategies also have their own intricacies, making professional guidance essential.


Inheritance Tax may indeed be a voluntary tax for those who engage in thoughtful planning and strategies. Nonetheless, gifting your main residence to your children without understanding the gift with reservation rules and the potential CGT implications could lead to unforeseen tax burdens. To avoid these pitfalls and ensure your estate planning achieves its desired objectives, it is imperative to consult with tax professionals who can guide you through the intricacies of UK tax law. In doing so, you can secure a brighter financial future for both yourself and your heirs, while minimizing the impact of the voluntary tax known as Inheritance Tax.