Capital Gains Tax on Gifts and Family Transfers: What a Gift Really Costs

Capital Gains Tax is charged on disposals, not on sales, and a gift is a disposal. Because there is no bargain at arm's length, the legislation substitutes market value for whatever consideration passed: TCGA 1992 s17 deems the disposal to be for the price the asset might reasonably be expected to fetch on a sale in the open market, and s18 extends the same treatment to every disposal between connected persons (CG14530, HMRC). Connected persons include your spouse or civil partner, your siblings, parents, grandparents, children and grandchildren, the spouses of all of those relatives, and your spouse's equivalent relatives; aunts, uncles, nieces and nephews are outside the definition (CG14580, HMRC).

The practical consequence is that you can owe a substantial tax bill on a transaction that raised no cash. Gift a flat you bought for £250,000 to your son when it is worth £400,000 and you have a £150,000 gain, taxed after the £3,000 annual exempt amount at the 2026/27 rates of 18% within your unused basic rate band and 24% above it (CGT rates, GOV.UK). The son's acquisition cost for his own future sale is the £400,000 market value, so the same growth is not taxed twice, but the tax on the first slice is due now, from your own pocket.

One more connected-person trap: losses. A loss on a gift or undervalue sale is clogged: under s18(3) it can only be set against gains on later disposals to the same person while you remain connected, not against your general gains (CG14561, HMRC). Crystallising a loss by gifting to a family member is usually a wasted move. If the asset you are gifting is your own main home, the position is far gentler: the gain on a gift is computed the same way as on a sale, so full Private Residence Relief can take the CGT to nil, and the harder questions are on the IHT side, covered below.

Transfers between spouses and civil partners who live together are the exception to everything above. They take place at no gain, no loss: no CGT is due on the transfer, and when your spouse eventually sells, their gain is calculated using your original acquisition cost, or the 31 March 1982 value for older assets (Capital Gains Tax: gifts, GOV.UK). The tax is deferred, not cancelled, and the whole gain lands on the selling spouse.

Used deliberately, this is the simplest planning tool in the CGT code. Transferring an asset, or a share of it, to a spouse before a sale means two annual exempt amounts of £3,000 each and, where one spouse has unused basic rate band, more of the gain taxed at 18% instead of 24%. The transfer must be genuine and outright, and the treatment depends on the couple living together, so separated couples need advice on timing. The rule follows the marriage, not the family: the same transfer to an adult child is fully chargeable at market value.

For two categories of gift, holdover relief lets the gain travel with the asset instead of being taxed on the way out. You pay no CGT on the gift; the recipient's base cost is reduced by the held-over gain, so they inherit the tax bill for the day they sell (Gift Hold-over Relief, GOV.UK).

Section 165 covers gifts of business assets: assets used in a trade carried on by you or by your personal company, meaning a company where you hold at least 5% of the voting rights, and shares in unlisted trading companies or in your personal trading company. Section 260 covers disposals that are chargeable transfers for Inheritance Tax, which in practice means most transfers into trust, and it is not limited to business assets: an investment property settled into a discretionary trust can be held over under s260 even though it could never qualify under s165 (HS295, GOV.UK).

Both routes carry conditions. The claim is made on the form in helpsheet HS295 filed with the Self Assessment return, jointly signed by transferor and transferee except for transfers to trustees, where the transferor claims alone. The recipient must generally be UK resident unless the gifted asset is an interest in UK land, and if a recipient emigrates within six years of the end of the tax year of the gift while still holding the asset, the held-over gain is clawed back and becomes chargeable (HS295, GOV.UK). That clawback matters in internationally mobile families. Holdover also interacts with later reliefs on a company sale, including base cost and Business Asset Disposal Relief, which we cover in our guide to selling shares in your company.

What neither section covers is the most common family gift of all: a buy-to-let transferred directly to an adult child. A rental property is an investment, not a business asset, so s165 fails, and a direct gift to an individual is a potentially exempt transfer rather than a chargeable transfer, so s260 fails too. The gain is taxable in full. Routing the property via a trust to capture s260 can work, but it brings trustee compliance, possible IHT entry charges above the nil rate band, and a settlor-interested restriction that kills the relief if you, your spouse or civil partner, or your minor children can benefit; see our guide to trusts and Inheritance Tax before treating it as a loophole.

A gift of UK residential property is caught by the same reporting regime as a sale: where CGT is due, you must file a UK Property Return and pay the tax within 60 days of completion, and interest and penalties follow if you miss it (Report and pay CGT on UK property, GOV.UK). For a gift, completion effectively means the date the transfer is executed, and the 60-day clock does not wait for a professional valuation, so commission one before the deed is signed, not after.

Two refinements. First, special rules apply to transfers to your spouse, civil partner or charity: a no gain, no loss transfer produces no tax and no 60-day return. Second, non-residents must report every disposal of UK property or land within 60 days whether or not any tax is due, gifts included; our guide to 60-day CGT reporting for non-residents covers that regime in full. Donors who have already moved abroad regularly miss this, assuming no tax means no filing.

CGT is only half the picture, because a lifetime gift is also an Inheritance Tax event. A gift to an individual is a potentially exempt transfer: no IHT is due if you survive it by seven years, and if you die within seven years the gift uses your nil rate band first, with taper relief reducing the tax rate on amounts above the band from 40% for deaths within three years, through 32%, 24% and 16%, down to 8% for deaths in years six to seven (Inheritance Tax: gifts, GOV.UK). The mechanics, exemptions and record-keeping are covered in our guide to the 7-year rule.

The trap that catches property gifts is reservation of benefit. Give your home to your children but carry on living in it rent free, and for IHT the gift never leaves your estate: HMRC treats it as a gift with reservation, the seven-year clock does not run, and the house is taxed at its full death-date value. The escape routes are narrow: genuinely move out, or stay only on full market rent reviewed and actually paid, or give away a share to children who live in the property with you (Passing on a home, GOV.UK). The same principle catches subtler retained rights, such as gifting a property, in the UK or abroad, while keeping a formal right to occupy it for life: the CGT disposal happens on day one, and the IHT saving never arrives.

The interaction between the two taxes is where gifts go badly wrong, because CGT and IHT pull in opposite directions. There is no CGT charge on death, and assets passing on death are rebased: your personal representatives and beneficiaries acquire them at market value at the date of death, wiping out the lifetime gain (HS282, GOV.UK). Keep a heavily appreciated asset until death and the capital gain evaporates, though the value sits in your estate for IHT. Gift it in lifetime and you pay CGT now on the full gain to shrink the future IHT bill. A failed gift with reservation is the worst of both: the property stays in your estate for IHT at its death-date value, while for CGT the gift was still a real disposal, so any tax paid bought nothing and there is no death uplift. For a large estate the right answer is a calculation, not a rule of thumb.

Because a gift raises no proceeds, the legislation offers a cash-flow valve. Where the gain on a gift cannot be relieved by holdover, and the asset given is land, a controlling holding of shares or securities, or any holding of shares or securities not listed on a recognised stock exchange, TCGA 1992 s281 lets you elect to pay the CGT by ten equal yearly instalments, the first due on the normal payment date (CG66452, HMRC).

The election is made in writing to HMRC at any time before the tax becomes payable, so it must be planned in advance, not discovered when the bill arrives. Two costs come with it: interest runs from the normal due date on the unpaid balance and is added to each instalment, and the outstanding tax becomes payable immediately if the recipient sells the asset for value (CG66452, HMRC). On our £35,280 example below, that is £3,528 a year plus interest, a manageable commitment where the family intends the child to keep the property. Note that s281 spreads the Self Assessment liability; for a UK residential property gift the 60-day return must still be filed on time.

Take a mother, a higher-rate taxpayer, who owns a buy-to-let flat bought for £250,000, now worth £400,000, and wants her daughter to have it. She is weighing three routes: an outright gift, a sale to the daughter at £300,000, and a sale at the full £400,000. The gain in every case is £150,000, because market value is substituted for both the gift and the undervalue sale. After the £3,000 annual exempt amount, £147,000 is taxable at 24%, which is £35,280 (CGT rates, GOV.UK).

The CGT is identical on all three routes, which surprises most families: selling cheap to a relative saves nothing, and the discount is simply a gift layered on top of a fully taxed disposal. What changes is everything else. The outright gift leaves the mother funding £35,280 with no sale proceeds, which is exactly where a s281 instalment election earns its keep, and starts a seven-year IHT clock on the full £400,000. The undervalue sale gives her cash to pay the tax and shrinks the potentially exempt transfer to £100,000, but the daughter must fund £300,000. The full-price sale involves no IHT transfer at all, though the estate now holds cash instead. The daughter's £400,000 base cost is the same on every route. If the flat were abroad, a UK-resident donor faces the same market value disposal, computed in sterling; see our guide to selling property abroad.

Most of the expensive mistakes in this area are made before any adviser is in the room: the deed is signed without a valuation, the 60-day deadline is discovered in month three, or a parent gives away a house they never really stop using. We advise on family transfers as a fixed-fee written plan: the CGT computation on market value, whether holdover or an instalment election is available and worth claiming, the 60-day filing where property is involved, and the IHT consequences modelled alongside so the two taxes are decided together. Fees are agreed upfront: personal returns from £350, non-resident and expat work from £550, and complex advisory work such as gift planning and trust transfers from £750.

If a family transfer is on the table this year, book a free 30-minute clarity call or read more about our UK property tax services. If the transfer has already happened and was never reported, start with our guide to working with a UK tax adviser and get the disclosure moving before HMRC writes first.