Gifting Property in Advance Might Save Some Inheritance Tax, But What About Retirement Funds?
- TBA
- Feb 21
- 3 min read
Updated: Feb 25
Following significant reforms to UK inheritance tax rules introduced by Chancellor Rachel Reeves in what has been dubbed the largest tax-raising budget in UK history, many individuals are seeking ways to reduce inheritance tax liabilities.
One of the most common strategies is to gift assets during one’s lifetime.
Over 200,000 Families Gift Property to Avoid Inheritance Tax
In the 2023/24 tax year, the Nil-Rate Band (NRB) for inheritance tax was £325,000. Any amount above this threshold is taxed at a rate of 40%. One of the simplest ways to avoid inheritance tax (IHT) is to spend or gift money while alive.
If you survive seven years after making a gift, the gift becomes exempt from inheritance tax. If you die within seven years, the tax rate on the gifted assets depends on how many years have passed:
Gifts made within three years before death are taxed at 40%
Gifts made three to seven years before death are taxed on a sliding scale
Rising Number of Gifted Properties
According to UK Land Registry data, approximately 130,000 properties were gifted each year in the past. By 2023, this number rose to 152,000, and in 2024, it has already exceeded 220,000. This trend indicates that over 200,000 families are transferring property ownership to children to avoid hefty inheritance tax bills.
Additionally, a study revealed that nearly one-third of savers are considering gifting money to family members more frequently to reduce their inheritance tax burdens.
Potential Risks: What Happens When You Run Out of Money?
While gifting assets to reduce inheritance, tax is a common strategy, experts caution against depleting resources entirely.
If you give away too much to your children, you may face financial difficulties during retirement. It’s essential to ensure that your retirement income can support your long-term needs before committing to significant asset transfers.
Taxes Involved When Transferring Property to Individuals
If a property is transferred to an individual, inheritance tax isn’t the only concern. Other potential taxes include:
Income Tax
If the property is the donor's primary residence, no income tax applies.
If it’s an investment property or a second home, capital gains tax (CGT) may apply.
Capital Gains Tax (CGT)
CGT applies to the profit (value increase) on the property at the time of the transfer.
If the property has appreciated since purchase, the donor may need to pay CGT.
Stamp Duty (SDLT)
If the property has an outstanding mortgage, stamp duty is calculated based on the unpaid loan amount.
If there’s no mortgage, stamp duty doesn’t apply.
Taxes Involved When Transferring Property to a Company
Another way to reduce inheritance tax is to hold property through a company. In this case, the property exists as shares in the company, and transferring ownership to the next generation involves transferring company shares rather than the property itself.
However, this can trigger other taxes:
Capital Gains Tax (CGT)
CGT is calculated based on the difference between the original purchase price and the market value of the property at the time of transfer.
Stamp Duty (SDLT)
Even if it’s the company’s first property, SDLT is calculated at the rate for second homes, typically an additional 3%.
If any company shareholders are overseas residents, an extra 2% overseas SDLT surcharge applies.
The Key Takeaways
While gifting property is an effective way to reduce inheritance tax, it’s vital to assess your financial situation thoroughly.
Consider the impact on your retirement funds and ensure you have enough resources to sustain your lifestyle.
Professional tax advice is highly recommended to navigate complex tax rules and identify optimal solutions tailored to your circumstances.
