Gifting Property to Children: Family Home or Investment Property?

Sarah Bradford looks at the gifting of property to a family member and considers whether it is better to pass on the family home or an investment property. 

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For many young people, the dream of buying their own home seems far out of reach. To help get on the property ladder, many offspring have benefited from the ‘bank of mum and dad’ to boost their deposit or help them secure a mortgage.  

However, where the parents have investment properties in addition to their own home, they may consider gifting a property to their son or daughter.  

The following case studies look at different tax implications, depending on whether the property in question is an investment property or the family home. 

Case study 1: Gifting an investment property 

Julia and David have a number of buy-to-let properties in the London area in addition to their main home. Their son Jake is struggling to save a deposit for his own property. As their tenants are moving out of one of the properties, which is in a location that would suit Jake, they are considering giving the property to him. They also think that this will help reduce the eventual inheritance tax (IHT) bill on their estate.  

The property in question has always been let; they have never lived in it as their main home. The property was purchased in 2010 for £140,000. It has now been valued at £310,000. The costs of purchase were legal fees of £1,200 and stamp duty land tax (SDLT) of £1,400. They have spent £22,000 on improving the property. Legal costs to transfer ownership to their son will be £1,000. 

The property is mortgage-free. 

As the property is being transferred to a connected person, the disposal is deemed to be at market value for capital gains tax (CGT) purposes. It is owned by Julia and David jointly and neither has used their annual exempt amount for 2025/26. The transfer of ownership took place on 21 November 2025. 

A chargeable gain will arise on the property as follows, allocated equally between Julia and David. 

The gain is allocated equally between Julia and David, so each has a chargeable gain of £72,200. Neither has used their annual exempt amount. Both pay tax at the higher rate. 

Each has a chargeable gain of £69,200 after deducting the annual exempt amount of £3,000. They must each pay CGT at the higher rate of 24% as their income and gains exceed the basic rate band, giving rise to a tax bill for each of £16,608 (and a combined bill of £33,216). 

As the gain is a residential property gain, they must report this to HMRC within 60 days of the disposal and pay the tax within the same time frame. 

As they have given the property to their son and received no consideration, they will need to find the funds from elsewhere to pay the tax. This is a disadvantage of giving away an investment property. To overcome this, they could instead sell the property to their son for a discounted price which would leave them sufficient funds to pay the tax. As the disposal is to a connected person, the gain would be calculated by reference to the market value of the property at the date of disposal rather than by the lower amount actually paid by their son. 

In the case of a gift, there is no consideration and thus no SDLT to pay. If the property is sold to the son for a discounted price, SDLT would only be payable if the consideration exceeded the residential SDLT threshold (£250,000 for a first-time buyer, or £125,000 otherwise). 

If the property is given to the son, it will be a potentially exempt transfer for IHT purposes. The property will be included in the estate for IHT purposes if the transferor dies within seven years of the date of the gift. Gifts given in the three years before the transferor's death are taxed at the full IHT rate of 40% to the extent they are not sheltered by the nil-rate band. Where the transferor lives at least three years from the date of the gift, taper relief applies to reduce the rate of tax. 

If the transferor does die within seven years of the date of the gift, potentially both CGT and IHT will be payable on the gift. 

Case study 2 –Gifting the main home  

Like Julie and David, Gill and Tony have a number of investment properties and a holiday let in addition to their main home. Their daughter Ellie lives in rented accommodation with her husband and young son. Gill and Tony have recently retired and plan to move to their holiday home on the coast. Rather than sell their family home, they are considering giving it to their daughter.  

The property has been their main residence throughout the time that they have owned it. They purchased it in 1998 for £200,000. It is now worth £870,000. They have spent £120,000 on improvements, which include an extension. The costs of purchase and transfer are £2,100. Gill and Tony own the property jointly as joint tenants. 

For CGT purposes, as the disposal is to a connected person, the consideration is the market value of £870,000. However, as the property has been occupied throughout as their main residence, the full amount of the gain is sheltered by principal private residence (PPR) reliefand there is no CGT to pay.  

Once Gill and Tony have moved to the former holiday let, this will become their main residence and any gain on a future sale of that property would benefit from PPR relief to the extent that the gain is attributable to their period of occupation and the last nine months. 

This can be contrasted with the position in case study 1, where the gift of an investment property to their son left Julie and David with a large CGT bill to be paid within 60 days of the disposal. 

For IHT purposes, the position is the same as regards the gift of the investment property in case study 1, in that an IHT liability may arise if the transferor dies within seven years of the date of the gift, subject to shelter by the nil-rate band. However, although the main residence was passed to a direct descendant, the residence nil-rate band is not available as the transfer was a lifetime transfer rather than one made on death. However, the residence nil-rate band would be available if their new main residence (the former holiday let) waspassed to a direct descendant on their death.  

It should be noted that in both cases, it is important that the parents do not continue to benefit from the properties gifted to their children, as should this occur the ‘gifts with reservation’ IHT anti-avoidance rules would be triggered. This would be the case if, say, they gave their main residence to their daughter but continued to live there rent-free. Care should also be taken to avoid triggering the ‘pre-owned assets’ income tax anti-avoidance rules. 

Practical tip 

If looking to give a property to an adult son, daughter or grandchild, consider whether it may be more beneficial to give away your main residence rather than an investment property, particularly if downsizing is on the cards. This potentially saves a CGT bill, which could be substantial.