Thinking of transferring your property to a loved one? Here’s what you need to know about Capital Gains Tax, Inheritance Tax, and SDLT.
Many people assume that gifting a home to a family member is tax-free — especially if it’s your main home. But if you’re gifting it to someone other than a spouse or civil partner, things can get complicated quickly.
In this post, we’ll break down what really happens when you gift a property in the UK, using a common real-life scenario as an example.
Case Study: Miko’s Situation (Name Changed)
Miko owns three properties:
- His main home, which he lives in with his 19-year-old nephew
- Two buy-to-lets in the North, which he’s planning to sell
- He earns £12,000/year from lodgers in his main home
- He’s also self-employed as a construction worker
Now, he wants to gift his main home to his nephew and sell the two buy-to-lets to buy a new home elsewhere.
1. Can You Gift Your Home Without Paying Tax?
If you’re gifting your main residence, you might assume there’s no Capital Gains Tax (CGT). But that’s only true if the whole property qualifies for Private Residence Relief (PRR).
In Miko’s case:
- He rents out rooms to lodgers
- He earns over £7,500/year, so Rent-a-Room Relief doesn’t apply
- That means part of the property may not qualify for full PRR
Bottom line: Gifting to a family member who isn’t your spouse is a taxable disposal. You’ll be taxed as if you sold the home at market value, even if no money changes hands.
2. Does the £40,000 Letting Relief Still Apply?
This is one of the most misunderstood rules.
Letting Relief, Still Exists, But Very Few Qualify
Many people assume they’re entitled to £40,000 Letting Relief just for having lived in the property once and then letting it out. But the rules changed in April 2020.
To qualify now, you must have:
- Lived in the property at the same time as your tenant (shared occupancy)
Letting Relief is now only available to live-in landlords, like those renting to lodgers while still living in the property.
The maximum relief is £40,000, but you’ll only get the lowest of:
- £40,000
- The amount of Private Residence Relief already due
- The portion of the gain relating to the let period with shared occupancy
✅ Miko may qualify because he rents to lodgers while living in the home — but the relief must be calculated carefully.
3. What About Inheritance Tax (IHT)?
When gifting a property to someone other than your Spouse:
- It’s treated as a Potentially Exempt Transfer (PET)
- If you survive 7 years, it’s outside your estate
- If you die within 7 years, IHT may apply depending on your estate’s value
Big catch: If you continue living in the property after gifting it, it becomes a “Gift with Reservation of Benefit”. That means:
- HMRC ignores the gift
- The full value of the property stays in your estate for IHT
- Unless you pay full market rent to the new owner
4. Selling the Buy-to-Lets? You Still Only Get One CGT Allowance
Miko plans to sell both buy-to-lets to fund a new home. That’s fine — but:
- He gets only one CGT allowance: £3,000 (2025/26)
- This covers all gains in the year, not per property
He’ll likely pay CGT at 18% or 24%, depending on income and the size of the gains.
💡 If the gains are large, he might consider selling in different tax years to spread the CGT hit.
5. Gifting vs Inheriting Through a Will: Which Is Better?
In many cases, leaving the property in your Will is simpler and more tax-efficient:
- No CGT on death
- No Gift with Reservation problem
- Your nephew may still benefit from your Residence Nil Rate Band (up to £175,000 extra tax-free)
If you’re planning ahead, it’s worth comparing both routes properly.
Want Our Free Guide?
Gifting Property to Family – 5 Costly Tax Traps to Avoid
We’ve prepared a SHORT GUIDE to help you understand the risks before gifting your home or investment property.
✅ Learn about:
- CGT on gifts to Children, Nieces and Nephews
- Letting Relief rules in plain English
- IHT pitfalls and 7-year rule
- SDLT impact on the person receiving the gift
- How to gift without triggering future tax problems
👉 [Click here to download your free guide]
Need Help Working This Out?
This stuff is complex — and mistakes are costly. At Grace Certified Accountants, we help clients:
- Calculate CGT and IHT on property gifts and disposals
- Structure transfers in a way that works for their family and future
- Plan property sales and purchases with full tax clarity
📞 Book a Property Tax Review or get in touch if you want clear advice tailored to your situation.
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