When a landlord gifts a buy-to-let property to an adult child, HMRC treats the disposal as if the property were sold at the open market value on the date of transfer. Any gain above the acquisition cost and allowable deductions is chargeable to CGT at residential property rates (18% for basic rate, 24% for higher/additional rate taxpayers, from April 2024).
In addition, the gift is a Potentially Exempt Transfer (PET) for IHT purposes. If the landlord dies within seven years of the gift, the property value falls back into the estate and IHT is assessed, subject to taper relief. Gifts within three years of death attract IHT at the full 40% rate.
CGT on gifting buy-to-let property
The core rule: a gift to a connected person (including children) is treated as a sale at market value:
- TCGA 1992 s18: transactions between connected persons (parent and adult child are connected) are deemed to be at arm's length market value, regardless of the actual consideration
- The gain is market value at date of gift minus original acquisition cost plus allowable enhancement expenditure and buying/selling costs
- Residential property CGT rates from April 2024: 18% (basic rate taxpayers) and 24% (higher/additional rate taxpayers). The annual CGT exempt amount is £3,000 for 2024/25 and 2025/26
- CGT report and payment is due within 60 days of completion via HMRC's UK Property Reporting Service — the same rule that applies on a sale
- Example: landlord bought a property for £150,000 in 2010, market value at gift is £350,000. Gain is £200,000. After the £3,000 exempt amount, taxable gain is £197,000. At 24% for a higher-rate taxpayer, CGT = £47,280
IHT and the 7-year rule on property gifts
A gift of property is a Potentially Exempt Transfer (PET) — it only becomes fully exempt after 7 years:
- PET: a gift to an individual (including a child) is exempt from IHT if the donor survives 7 years from the date of the gift
- If the donor dies within 3 years of the gift: the full value is treated as part of the estate and IHT at 40% applies (subject to available nil rate band)
- Taper relief: if the donor dies 3–7 years after the gift, the IHT rate tapers from 32% (years 3–4) down to 8% (years 6–7)
- Cumulation: the gift is set against the nil rate band (£325,000) in chronological order. If the estate nil rate band is already exhausted by other gifts, the property gift will be taxable at the applicable tapered rate
- Taper relief reduces the IHT rate, not the value of the transfer — this is commonly misunderstood. A gift of £500,000 made 5 years before death at 16% taper rate costs £80,000 in IHT, not a tapered amount of the value
The gift-with-reservation-of-benefit trap
The most serious pitfall: gifting a property but continuing to benefit from it brings it back into the estate:
- Gift with reservation (GWR) rule under FA 1986 s102: if you give away a property but continue to benefit from it — for example by continuing to receive the rent, or living in it — the gift is ineffective for IHT purposes and the full value remains in your estate
- The GWR rule overrides the 7-year rule entirely: even if the donor lives another 20 years, the property stays in the estate if the reservation was never released
- Common mistake: a landlord gifts a rental property to their adult child, but the rental income continues to be paid into the landlord's bank account (an arrangement for convenience). HMRC will treat this as a reservation of benefit
- To avoid GWR: the donee must receive all the benefit immediately after the gift — in the context of rental property, this means the rent must flow to the child from the date of transfer
- Pre-owned asset tax (POAT) under FA 2004: if a gift-with-reservation is released (the benefit is surrendered), the donor may face an annual income tax charge based on a notional rental value of the property — specialist advice is needed before releasing a reservation
Holdover relief: when it applies to property gifts
Holdover relief can defer CGT on certain gifts, but does not apply to buy-to-let residential property in most cases:
- Business asset holdover relief (TCGA 1992 s165): defers CGT on gifts of qualifying business assets — does NOT apply to buy-to-let residential property because letting is investment activity, not a trading business
- Hold-over relief on gifts that are immediately chargeable to IHT (TCGA 1992 s260): applies to gifts into certain trusts (which attract immediate IHT as chargeable lifetime transfers). Gifts to discretionary trusts can qualify — but the complexity and 10-year anniversary charges make this a specialist planning area
- Holdover relief on transfers to a company: TCGA 1992 s162 incorporation relief can defer CGT on transferring a property portfolio to a company in exchange for shares — but strict conditions apply (the transfer must be of a genuine business, and HMRC resists the argument that residential letting is a business for this purpose unless there is significant additional activity)
- Shares in unquoted companies: if a buy-to-let portfolio is held in a limited company and the landlord gifts shares to a child, s165 holdover relief CAN apply to the shares (as shares in an unquoted trading company), potentially deferring the CGT that would otherwise arise on the deemed disposal of the shares at market value
- Net result: for most landlords gifting individual buy-to-let properties directly to children, CGT cannot be held over and must be paid within 60 days of completion
Strategies for landlords considering gifting property
Practical options for making a gift tax-efficiently:
- Gift outright and pay CGT: straightforward, starts the 7-year IHT clock immediately, but requires a CGT payment within 60 days of transfer
- Transfer to a limited company (incorporation): if the landlord then gifts shares in the company rather than the properties themselves, s165 holdover relief may be available on the shares — reducing the CGT cost of the gift. However, SDLT on the incorporation transfer must be modelled
- Joint ownership with children: adding a child as a joint owner (tenants in common) transfers a share of the property at market value (CGT on the share gifted), starts the IHT clock on that share, and passes future growth outside the landlord's estate
- Nil rate band gift: a gift up to £325,000 in value uses the nil rate band. If combined NRB is available (both spouses' bands unused), gifts up to £650,000 can be made using both NRBs sequentially before IHT applies
- Annual exemption and normal expenditure: the £3,000 annual gift exemption and normal expenditure out of income exemption do not help with property (too small for property values) but are useful for redistributing rental income to family members once the property is owned by them
- Always take combined CGT and IHT advice: the optimal strategy is highly fact-specific and must model CGT, IHT, SDLT (if applicable), and any interaction with the donor's income tax position
Frequently asked questions
Do I pay CGT when I give a property to my child?+
Yes. HMRC treats a gift to a connected person (including your adult child) as a disposal at full market value, even if no money changes hands. CGT is calculated on the gain between the market value on the date of gift and your original acquisition cost plus allowable expenses. The CGT must be reported and paid within 60 days of completion using HMRC's UK Property Reporting Service.
Does the 7-year rule apply to gifted property?+
Yes. A gift of property to an individual is a Potentially Exempt Transfer (PET) for IHT purposes. If you survive 7 years from the date of the gift, the value is fully outside your estate. If you die within 3 years, the full value is taxed at 40% IHT (subject to nil rate band). Between 3 and 7 years, taper relief reduces the IHT rate from 32% to 8%. Taper relief reduces the rate applied to the value — not the amount of the transfer.
What is a gift with reservation of benefit?+
If you gift a property to your child but continue to benefit from it — for example, you continue to receive the rent, or you live in it — HMRC treats the gift as ineffective for IHT purposes under the gift-with-reservation-of-benefit rules. The property remains in your estate regardless of how long you live. The 7-year IHT clock does not run. The donee must receive the full benefit (including the rent) immediately after the transfer for the gift to be effective.
Can I avoid CGT by transferring property to my child?+
Not by the transfer itself. No CGT holdover relief is available for gifts of residential buy-to-let property to individuals — you must pay CGT based on the market value gain regardless. One option is to hold the property in a limited company and gift shares in the company to your child — business asset holdover relief can potentially defer CGT on shares in an unquoted company (but not on the properties themselves). Always take specialist advice before restructuring.