Tax on gifted property - what you need to know before giving away a house

If someone gifts you a property, there is no immediate Income Tax charge on receiving the gift. However, other taxes may apply. If the property has a mortgage and you take on that debt, Stamp Duty Land Tax (SDLT) may be payable on the value of the mortgage you assume. Capital Gains Tax is payable by the person making the gift if the property has increased in value since they acquired it, because HMRC treats the gift as a disposal at market value. For Inheritance Tax purposes, the gift becomes a potentially exempt transfer (PET). If the person who gifted the property dies within 7 years, the value of the property may be included in their estate for IHT calculations. You should always seek professional tax advice before accepting a property gift.

The 7-year rule applies to Inheritance Tax on lifetime gifts. When someone gifts a property (or any asset above the nil-rate band), it is classified as a potentially exempt transfer (PET). If the person who made the gift survives for 7 years after the date of the gift, the transfer falls entirely outside their estate for IHT purposes and no Inheritance Tax is due on it. If they die within 7 years, the value of the gift is brought back into the estate calculation. Taper relief reduces the IHT payable on a sliding scale if death occurs between 3 and 7 years after the gift. If death occurs within 3 years, the full IHT rate of 40 percent applies to the value of the gift above the available nil-rate band.

A gift with reservation of benefit (GROB) is a gift where the person who gave the asset away continues to benefit from it. For property, the most common example is a parent who transfers their home to their children but continues to live in it without paying a full market rent. HMRC treats such gifts as if they never happened for Inheritance Tax purposes, meaning the property remains part of the donor's estate at death regardless of when the transfer took place. The 7-year rule does not apply to gifts with reservation. To avoid GROB rules, the donor must either move out of the property entirely or pay a full commercial rent to the new owner. These rules exist to prevent people from reducing their IHT liability while continuing to enjoy the asset they claim to have given away.

Neither option is straightforwardly better, as each has different tax consequences. Gifting triggers CGT for the donor based on the market value of the property (not the fact that no money changed hands) and creates a potentially exempt transfer for IHT purposes. Selling at market value means CGT is calculated on the actual sale price, but the sale proceeds remain in the seller's estate for IHT. Selling below market value to a connected person is treated by HMRC as a disposal at market value for CGT purposes, so the donor pays CGT on the full gain regardless of the price received. The best approach depends on the donor's overall estate value, whether they have used their CGT annual exempt amount, the property's gain since acquisition, and their long-term plans. Professional advice from a tax adviser or solicitor is essential before making a decision.

If a property is gifted to you with no outstanding mortgage, there is generally no Stamp Duty Land Tax (SDLT) to pay because SDLT is calculated on the consideration (the price paid) for the transfer, and a genuine gift has zero consideration. However, if the recipient takes on an existing mortgage as part of the gift, the outstanding mortgage balance is treated as consideration for SDLT purposes. You would pay SDLT on that amount at the standard rates. Additionally, if the gifted property is your second property, the higher rates for additional dwellings (currently a 5 percent surcharge in England) may apply to whatever consideration is involved. It is also worth noting that if HMRC considers the transfer to be part of a wider arrangement involving payment, the full market value could be treated as the consideration.