A gift may seem simple: you give something to someone else without expecting anything in return. While that seems straightforward, gifts can carry complex tax consequences. In the UK, giving away an asset during your lifetime can trigger both Capital Gains Tax (CGT) and Inheritance Tax (IHT). Understanding how these apply can help you plan effectively and avoid unexpected tax bills.
What Counts as a Gift for Tax Purposes
A gift is not an arm’s-length sale or an investment. It is a unilateral transfer: the donor gives an asset without receiving anything in return. For CGT, a gift is treated as a disposal, just as if it had been sold. For IHT, only gifts are relevant, not sales, so gifting can be used to reduce the size of your taxable estate on death.
For a gift to be complete, both legal ownership and beneficial ownership must pass to the recipient. Legal ownership refers to whose name the asset is in, while beneficial ownership is who enjoys the benefit of it. For land, beneficial ownership is presumed to follow legal ownership under section 60(3) of the Law of Property Act 1925. For other assets, the presumption is that beneficial ownership stays with the donor unless there is evidence a gift was intended. Without this, the law may treat the transfer as a “resulting trust” with the asset still belonging to the donor.
To avoid this, it is sensible to keep a short-written note confirming that a transfer was intended as a gift. This is especially important for valuable assets such as shares or investments.
Gifting to Individuals vs Trusts
Gifts can be made to another person directly or placed into a trust (known legally as a settlement). If a trust is not properly set up, the assets may still be treated as belonging to the donor because of the resulting trust principle. If the transfer is valid, different tax rules apply depending on whether the gift is to an individual or into a trust.
Capital Gains Tax (CGT) on Gifts
For CGT, a gift is treated as if sold for its market value, even though no money is received. This can create a “dry” tax charge, where CGT is due despite receiving no sale proceeds. Some assets are exempt from CGT, such as cash, personal possessions worth less than £6,000, machinery used in a business, and an individual’s main residence.
Where a gift would trigger CGT, holdover relief may be available. This defers the gain by transferring the donor’s original base cost to the recipient, meaning tax is only due when the recipient later disposes of the asset. Holdover relief can apply to assets used in the donor’s trade, and to gifts that are immediately chargeable to IHT (such as most gifts into or out of trust).
Inheritance Tax (IHT) on Gifts
IHT looks at the reduction in the donor’s estate when a gift is made. That reduction only becomes permanent if the donor survives for seven years. Gifts to individuals are Potentially Exempt Transfers (PETs): they become tax-free after seven years, but if the donor dies sooner, they are added back into the estate. Gifts into most trusts are Chargeable Lifetime Transfers (CLTs). These can trigger an immediate IHT charge if over the nil-rate band, but no further charge arises after seven years.
If a PET fails, taper relief can reduce the IHT payable if the donor dies between three and seven years after making the gift. There are also useful reliefs: an annual £3,000 exemption (with one year’s carry forward), a £250 small gifts allowance to any number of people, and special wedding gift exemptions. Agricultural Property Relief (APR) and Business Property Relief (BPR) can also reduce the taxable value of qualifying assets to nil. These reliefs are currently unlimited, but from April 2026 they are expected to be capped at £1 million per person. Under draft Finance Bill rules, gifts made before 30 October 2024 will still qualify for unlimited relief if they fail, while those made after will only do so if the donor dies before April 2026.
Key Takeaways
Lifetime gifting can be an effective estate planning tool, but it carries tax risks. Always document gifts to show beneficial ownership has passed and be aware that CGT can arise even if you receive no proceeds. Consider holdover relief for qualifying business or trust gifts. For IHT, plan around the seven-year rule and use the available exemptions and reliefs — especially ahead of the proposed cap on APR and BPR from 2026.
With careful planning, you can ensure your generosity benefits your loved ones rather than the taxman.
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation. If you are employed or self-employed either as a sole trader, partnership or limited company and want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us by telephone on 01925 413210 or by e-mail to info@watkinsonblack.com. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
