Is gifting property to your grandchildren a good idea? Key factors to consider

Home ownership has become increasingly difficult for many young adults due to ongoing cost of living pressures and rising property values.

Figures published by Fairer Share show that average UK house prices more than tripled between 1998 and 2018, rising from £70,000 to £224,000. In January 2025, the average house price was £267,200. This increase has significantly outpaced wage growth.

If you’re financially secure with a comfortable retirement income, gifting property to your grandchildren might seem like a straightforward way to help them overcome these obstacles – while also reducing a potential Inheritance Tax (IHT) charge on your estate in the future.

However, the reality is often more complicated.

Keep reading to discover some important factors to consider before gifting property and learn about alternative ways to support your grandchildren.

How much you could pass on free from Inheritance Tax

Provided you are gifting directly to a UK based individual (and not a Trust), there is no limit on the gift you can make, potentially free of IHT. Potentially is the key word here, because such gifts are referred to as Potentially Exempt Transfers, or PETs.

PETs are typically exempt from IHT provided you survive for seven years after making the gift.

If you don’t survive 7 years, whether IHT applies or not will depend upon your available Nil Rate Bands. The ‘failed’ PET will first of all use up any available Nil Rate Band (meaning it is not available upon your remaining Estate), and any amount above this will be subject to IHT.

Everyone has a standard IHT allowance – the nil-rate band – which allows you to pass on the first £325,000 of your estate free of IHT.

An additional allowance – the residence nil-rate band – of up to £175,000 is available if you leave a qualifying residence to direct descendants (children, grandchildren, stepchildren and adopted children). However, this allowance is only available at the point of death.

This allowance is reduced by £1 for every £2 that an estate exceeds £2 million and is lost completely when its net value reaches £2.35 million or more (or £2.7 million if you inherit unused residence nil-rate band from your spouse or civil partner).

The government has frozen the nil-rate band and the residence nil-rate band at their current levels until at least April 2031.

HMRC rules state that money, property, land, investments, and personal belongings all count as gifts for IHT purposes; essentially, anything that has value. Any money you lose when you sell something for less than it’s worth (to a family member) is also considered a gift. For example, if you sell your house to a child or grandchild for less than its market value, the difference in value counts as a gift.

Potential risks of giving away your home and still living in it

Gifting your primary residence to your grandchildren while continuing to live there could offer several benefits, including:

• Helping your grandchildren onto the property ladder
• Potentially reducing a future IHT bill by removing a high-value asset from your taxable estate
• Starting the seven-year countdown towards making your gift fully exempt from IHT
• Allowing your beneficiaries to inherit your home without waiting for probate.

However, it’s important to consider the risks and limitations of giving up legal ownership of your home, such as:

• Disagreements about how to manage or use the property could damage family relationships.
• If you fall out with your grandchild or their circumstances change (for example, bankruptcy or divorce), you may be forced to move out.
• You’ll be unable to use the equity to fund later-life care or any other unexpected costs that arise.
• If the recipient of your gift dies before you, ownership of the property may pass to another beneficiary under their will or intestacy, which may not align with your wishes.
• If you fail to pay full market rent to the new owner under a commercial tenancy agreement, the “gift with reservation of benefit” rule applies. This means the property remains part of your estate and will be included in IHT calculations when you die, no matter how many years have passed since you made the gift.
• Your grandchildren will lose various first time buyer benefits, and particularly if they are not living there, they’ll need to find their own accommodation in any case.
• If they are working, all of the rental income you pay them will be subject to tax at their marginal rate of tax.
• You could potentially be risking losing the benefits of the Residence Nil Rate Band, as you won’t own a home when you pass away.
• Properties transactions are expensive – and ownership is not easily divided, so this may not be a practical approach if you have multiple grandchildren.

Capital Gains Tax on gifting property that’s not your main residence

Capital Gains Tax (CGT) is due when you dispose of an asset and make a gain. Gifting property is classed as a disposal in the eyes of the law, even if no money changes hands.

If the property you gift your child or grandchild has not been your main residence for the entire time you’ve owned it, you could face a CGT bill.

CGT will be charged on the difference between the amount you paid for the property and its market value on the day you gifted it, with some allowances for purchase and sale costs, as well as major works carried out.

In 2026/27, you can make gains of up to £3,000 without paying CGT. Beyond this, individuals pay CGT at 18% on the part of the gain that falls within their basic-rate Income Tax band and 24% on any amount that exceeds this.

You must report and pay any CGT due using HMRC’s “real-time” Capital Gains Tax service within 60 days of the property transfer completing. You may have to pay interest and a penalty if you don’t report and pay on time.

4 alternative ways to support your grandchildren

Before gifting a property to your grandchildren, it’s important to weigh up the pros and cons, and explore alternative options. Here are four alternatives to consider:

Leave the property in your will

This allows you to keep control of your property and access the equity during your lifetime, while still making use of the residence nil-rate band, provided you leave your home to direct descendants. However, IHT may still be due, depending on the total value of your estate.

Consider using trusts

Placing assets in a trust gives you control over the timing and conditions of your grandchildren’s inheritance. A well-structured trust could also reduce the risk of family wealth being lost in a divorce or to creditors.

However, trusts can be complex, and there may be IHT charges to pay, so it’s important to seek professional advice to ensure the structure fits your circumstances, goals and wider financial plan.

Make regular gifts from income

“Normal expenditure out of income” is an underused, yet potentially valuable IHT exemption. It allows you to make regular gifts from surplus cash without paying IHT. For example, you could pay your grandchildren’s school fees or mortgage payments.

However, to qualify for this relief, your gifts must:

• Be part of a regular, habitual pattern of giving, such as monthly or annually
• Be paid from income, not savings or capital
• Not diminish your standard of living.

Sell the property, and then do something with the proceeds

If you can afford to, another alternative would be to sell the property at market value, freeing up capital to use. You could then use these funds in several ways – for example, by spending them (reducing your IHT liability) or gifting some or all of the money to family. This gives your grandchildren capital they can use for any purpose they wish, rather than passing them an asset they can’t directly benefit from.

Get in touch

If you have further questions about how Inheritance Tax and gifting work, or you’d like help creating an estate plan for passing wealth on tax-efficiently, we’d love to hear from you.

Please get in touch by email at helpme@aspirellp.co.uk or call 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.