Passing on property: What to consider before gifting to the next generation 

Many parents who own a second property, whether a buy-to-let, a holiday home or a long-held investment, will at some point start to think about passing it on. For some, that conversation is prompted by rising property values or concerns about inheritance tax. For others, it is simply about wanting to see children benefit sooner rather than later. 

Gifting a property during your lifetime can make financial sense in the right circumstances. However, it can also create tax liabilities, legal complications and family difficulties that were never anticipated. The difference often comes down to whether the full picture has been considered before any decision is made. 

Starting with the right foundations 

Before any tax calculation is done, the more fundamental considerations are personal ones. Can you genuinely afford to give the property away, along with the income it generates? Is the decision being made freely, without pressure? Have you taken financial advice to understand how this would affect your position if circumstances change? Do your Wills need updating to reflect a changed asset position? 

These questions matter because an outright gift is permanent. Many families approach this decision with entirely good intentions, wanting to help children onto the property ladder or reduce a future tax bill, without fully appreciating that once the property transfers, there is no straightforward way of reversing that decision. If you later need access to funds, or if family circumstances shift in ways that could not have been predicted, the options available to you will be limited. Taking time to consider whether you are genuinely comfortable letting go of the asset, and what you would do if your own needs changed, is not simply a preliminary step. It is central to the decision itself. 

One practical point worth addressing early is whether the property carries a mortgage. Where the children take on an existing mortgage as part of the transfer, the loan amount is treated as chargeable consideration for stamp duty land tax purposes, which can give rise to a liability that would not otherwise arise. It may be worth considering whether the mortgage could be cleared before the gift is made. Where the property is transferred free of any mortgage, stamp duty land tax does not apply to the gift itself. 

What happens to the property once it leaves your hands 

Once the property is in the children’s hands, its future is shaped by their circumstances as much as by any planning put in place at the outset. This is the area where we most often see problems arise, and where the gap between good intentions and difficult outcomes can be widest. 

If a child later divorces, the property could be treated as a matrimonial asset and form part of a financial settlement. If a child becomes bankrupt, it could be reached by creditors. If a child loses mental capacity without a lasting power of attorney in place, even basic decisions about managing or selling the property could become very difficult to make. None of these are remote possibilities, and all of them deserve consideration before any gift is made. 

Where the property passes to more than one child, decisions about how it is managed, how costs are shared, and whether or when to sell can become a source of real tension. In these situations, a declaration of trust is often a sensible and important step. This is a legal document that records clearly how the property is owned between the parties, how decisions about it are to be made, how any income is to be divided, and what happens if one owner wants to sell. It does not prevent disagreements from arising, but it provides a clear framework for resolving them and can avoid significant difficulties further down the line. 

The capital gains tax position 

Where a property has increased in value since it was purchased, gifting it to children will trigger a capital gains tax liability for the parents, calculated on the difference between the market value at the date of the gift and the original purchase price. Certain costs can be deducted, and the balance is taxed at 18% or 24% depending on the parents’ income and gains in that tax year. 

One point that is often overlooked is that this liability arises at the point of the gift, rather than on any later sale. The parents receive no proceeds from which to pay the tax, yet the obligation to report and pay it within 60 days still applies. This can come as an unwelcome surprise if it has not been factored in from the outset, and it is one of the most common points at which early advice makes the biggest practical difference. 

There is a further CGT consideration that deserves attention. When a property passes through an estate after death, beneficiaries inherit it at its value on the date of death rather than at the price originally paid, meaning any gain built up over the parents’ lifetime does not follow the property into the next generation. Gifting during the parents’ lifetime means the children take it over at the original purchase price instead, so any gain since that original purchase remains potentially taxable if they later sell. In practice, this trade-off between CGT exposure and inheritance tax saving is one of the more frequently misunderstood aspects of property gifting, and it is rarely as straightforward to resolve as it first appears. 

The inheritance tax position 

A gift of property to a child is treated as a potentially exempt transfer for inheritance tax purposes. Provided the parents survive for seven years after making the gift, it falls outside their estate entirely. If death occurs within seven years, the gift is brought back into account, with taper relief reducing the tax where death occurs more than three years after the transfer. 

There are two aspects of this that are particularly important to understand. The first is what happens if the parents continue to benefit from the property after giving it away, for example by using a holiday home without paying a market rent to the children. In that situation the reservation of benefit rules apply and the property remains in the parents’ estate for inheritance tax purposes, regardless of how long they survive. This is an area that catches people out more often than might be expected, particularly with holiday properties where continued use feels natural and the implications are not always obvious. The second is the interaction with any earlier gifts. If the parents have made other transfers in the years before this gift, the cumulative position can affect the inheritance tax calculation, and the picture may need to be assessed over a longer period than simply the seven years before death. 

Considering a trust instead 

For parents who want to pass on a property but have concerns about the risks that come with an outright gift, settling it into a trust can offer a more controlled alternative. A trust is a legal arrangement under which the property is held by trustees for the benefit of named beneficiaries. Unlike an outright gift, it allows parents to retain a degree of influence over how and when the property benefits the children, and can offer meaningful protection against the risks of divorce and bankruptcy that would otherwise leave the property exposed. 

From a capital gains tax perspective, one practical advantage of a trust is that holdover relief is available, allowing the gain to be deferred rather than triggered at the point of transfer. For a property that has appreciated substantially in value, this can make a trust structure considerably more attractive than an outright gift where a dry CGT charge would otherwise arise immediately. 

The inheritance tax treatment involves more moving parts. Most lifetime trusts fall within the relevant property regime, which means the nil rate band, currently £325,000, limits how much can be settled without triggering an immediate 20% entry charge on the excess. A trust also carries periodic charges every ten years and exit charges when assets leave, though these are capped at 6% and are considerably lower than the 40% inheritance tax rate that might otherwise apply on death. For larger estates, that trade-off often works in favour of the trust, though the right structure depends very much on the individual circumstances. 

How the rental income generated by the property is taxed once it is in trust depends on whether beneficiaries have a right to receive it or whether it accumulates within the trust. This is an area where the detail of the structure matters, and taking advice on it at the outset is important. 

Bringing it together 

Gifting a property to the next generation can deliver genuine long-term benefits, but the decisions involved are closely connected. The capital gains tax position, the inheritance tax implications, the choice between an outright gift and a trust, and the practical realities of giving up ownership all need to be considered together rather than in isolation. 

In our experience, the families who navigate this most successfully are those who come to the conversation early, before any steps have been taken, and with a willingness to consider the full range of outcomes rather than focusing on a single objective. If you are thinking about passing on an investment property, taking advice at an early stage can help you explore the options available and choose an approach that reflects both your financial position and your family’s needs. Coodes’ Private Client team would be happy to discuss your circumstances. 

About the Author: Sarah Cornish leads the Private Client team at Coodes Solicitors and is a member of the firm’s Executive Board. Qualifying in 2007, she has built extensive experience in Wills, trusts, estate administration and tax planning, helping individuals and families protect and preserve wealth across generations. Sarah is a full member of STEP, a Fellow of the Agricultural Law Association and an accredited member of the Association of Lifetime Lawyers, and also acts as a professional Attorney and Deputy. 

Get in touch: sarah.cornish@coodes.co.uk  01579 325 793