The Gift That Isn’t Really a Gift
Many Parents decide to gift their home to their Children during their lifetime, hoping to reduce Inheritance Tax.
But if you still live in the property after gifting it — especially rent-free — HMRC may treat the property as never having been gifted at all.
This is called a Gift With Reservation of Benefit (GWR), and it can undo your entire tax planning strategy.
Here’s how it works — and how to avoid the trap.
If you’ve read my previous article on Inheritance Tax and the 7-Year Rule, you’ll know timing matters when it comes to gifting. But what happens if you still live in the property you’ve gifted?
👉 Catch up first: Inheritance Tax and the 7-Year Rule – What You Need to Know
What Is a Gift With Reservation of Benefit?
A Gift With Reservation happens when you give away an asset but keep enjoying its benefits.
For example:
- You gift your house to your child but continue to live in it rent-free.
- You gift a rental property but still collect the rent.
- You give away part ownership but remain in full control of how it’s used.
In these cases, HMRC says the gift is “with reservation” — meaning it’s still part of your estate for Inheritance Tax purposes.
🎥 Watch: Gift With Reservation – Why Living in a Gifted Property Can Backfire (UK 2025/26)
If you prefer to watch instead, here’s my video where I explain what HMRC’s “Gift With Reservation” rule means, what counts as still benefiting from a property, and how the Pre-Owned Asset Tax can add an extra income-tax charge for landlords.
👉 YouTube video live on 19 October.
In these cases, HMRC says the gift is ‘with reservation’ — meaning it’s still part of your estate for Inheritance Tax purposes.
Why It Matters
If a gift is classed as “with reservation”, the property’s full market value at your death goes back into your estate for IHT.
That means:
- No 7-year rule benefit
- No taper relief
- Your family could face up to 40% tax on a property you thought you’d given away
Even worse, if the property has also increased in value, it could create a Capital Gains Tax problem for the person who received it.
The Classic Example
You gift your £500,000 home to your daughter in 2017.
You continue living there rent-free.
You pass away in 2025.
Because you never paid rent, HMRC says it’s still yours.
So the full £500,000 is included in your estate for Inheritance Tax.
If you had moved out — or paid your daughter market rent — the gift would likely have been valid for IHT purposes.
How to Avoid a Gift With Reservation
To make your gift effective for tax purposes, you must:
- Completely give up benefit of the property (move out, or stop using it).
- Pay market rent if you still live there.
- Keep written evidence — rental agreements, standing orders, or bank payments.
If you’re gifting a property that your family still needs to use — for example, shared homes or holiday properties — you may need a Trust structure instead, read: Alternatives to Gifting Property – Trusts, Joint Ownership & Insurance (blog coming on 21 October).
The Pre-Owned Asset Tax (POAT) Rule
Even if you try to work around the rules, HMRC has another safeguard — the Pre-Owned Asset Tax.
If you give away a rental property or buy-to-let (BTL) but still receive or benefit from the rent, HMRC may treat you as if you still own the asset.
In that case, they can apply an annual income tax charge on the value of that benefit — effectively taxing you on the rental income you’ve retained control of.
POAT can also apply if you continue to occupy or use an asset you’ve given away (for example, a holiday let or shared family property), even if you no longer hold the legal title.
To avoid this, you generally need to:
- Stop receiving or controlling the rental income, or
- Pay full market rent if you continue to use the property.
In some cases, you can elect to bring the asset back into your estate for Inheritance Tax purposes instead — but that rarely helps unless part of wider estate planning.
Case Study
John gifted his buy-to-let property to his son, but continued to receive the rent into his own account.
When HMRC reviewed the arrangement, they applied the Pre-Owned Asset Tax, charging John annual income tax on the rental value each year.
When John later died, the property was still included in his estate for Inheritance Tax purposes — meaning the family lost out on both sides.
Had John stopped receiving the rent or set up a Trust structure, the tax outcome would have been completely different.
Key Takeaways
- A Gift With Reservation cancels out Inheritance Tax savings if you still live in or benefit from the property.
- Paying market rent or completely giving up the benefit makes the gift effective — but the arrangement must be genuine.
- The Pre-Owned Asset Tax (POAT) can apply if you gift a rental or buy-to-let property and continue to receive or control the rent.
- In that case, HMRC can charge you income tax each year on the rental value of the benefit you’ve kept.
- Using a Trust or professional structure can help where family members still share or rely on the property.
Final Word
Gifting your home to your children can work — but only if the gift is complete.
If you still benefit from the property, HMRC will almost always pull it back into your estate.
Moving out or paying rent can fix a Gift With Reservation — but for many families, that’s not practical.
👉 Next in this series: Alternatives to Gifting Property – Trusts, Joint Ownership & Insurance(Blog 5 available 21 October)
📞Book a Property Tax Review before making any property gift. A short review can prevent a costly mistake later.