Many families focus entirely on Inheritance Tax when planning a property gift and overlook Capital Gains Tax. This can result in an unexpected and significant tax bill arising immediately — even though no money changes hands. Understanding the CGT implications is essential before any property transfer is completed.
When Does CGT Apply to a Gift?
HMRC treats a gift of property as a disposal at current market value for CGT purposes. This means that even though you receive nothing in return for the gift, you are treated as if you sold the property at its full open market value on the date of transfer. If the property has increased in value since you purchased it, a CGT liability arises on that gain.
The CGT liability arises immediately on the date of transfer — not when the recipient eventually sells the property. You may need to fund a significant tax bill from other resources, even though you have received no cash from the gift.
Main Residence vs Second Properties
The rules differ depending on whether the property is your primary residence. If you gift your main home, Private Residence Relief typically means no CGT is due — the gain on your primary residence is generally exempt. However, if you gift a second home, buy-to-let property, or any property that is not your primary residence, CGT applies on the full gain since purchase.
CGT Rates on Property
CGT on residential property is charged at 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers (rates applicable from April 2024). On a buy-to-let property that has doubled in value, the CGT bill can be substantial. This must be factored into any gifting strategy alongside the potential IHT saving.
Planning Around CGT
There are legitimate ways to manage CGT when gifting property — including timing the transfer to use annual CGT allowances, considering whether a trust structure might be more appropriate, or phasing the transfer over multiple tax years. Each approach has its own implications and professional advice is essential to ensure the strategy is tax-efficient overall.