A parent can give their home to a child and carry on living there without it counting as a gift with reservation, provided they pay full market rent for their occupation throughout. HMRC expects the rent to be set at arm’s length, on independent advice, reviewed in line with the market and actually paid; if it falls below full value at any point in the seven years before death, the home can come back into the estate.

Why does paying rent stop it being a gift with reservation?

Under section 102 of the Finance Act 1986, a gift is a gift with reservation if the person receiving it does not take genuine possession and enjoyment of it, or if at any time in the relevant period the giver is not excluded from benefiting. The relevant period runs from the later of the date of the gift and seven years before death, up to death (IHTM14301). A parent living in a home they have given away is the classic case.

Paragraph 6(1)(a) of Schedule 20 to the Finance Act 1986 provides the way out. The giver’s occupation of property they have given away is disregarded if it is for full consideration in money or money’s worth. HMRC’s manual at IHTM14332 adds that the child’s receipt of a full open market rent counts as the child taking possession and enjoyment of the gift, so both limbs of the test are met. For gifts of interests in property made on or after 9 March 1999, IHTM14360 confirms there is no gift with reservation where the giver hands over the freehold but keeps, or is granted, a lease at a full rent, and the transfer of the freehold is a potentially exempt transfer.

For the wider rules and other exceptions, see gifts with reservation of benefit.

What does HMRC accept as full consideration?

There is no formula. IHTM14341 says it depends on the precise facts, but an acceptable arrangement would include evidence of a bargain negotiated at arm’s length, by parties who were independently advised, following the normal commercial criteria in force at the time. GOV.UK puts it more simply: to keep living in a home after giving it away, the parent needs to pay rent to the new owner at the going rate for similar local rental properties and pay their share of the bills.

In practice that points to:

  • a written tenancy or lease setting out the rent, the review dates and who pays which outgoings;
  • a rental valuation from a letting agent or surveyor at the start, kept with the family papers;
  • separate advice for parent and child, so the terms are not simply what suits the family;
  • rent paid by bank transfer on the due dates, not added up and settled occasionally.

Does the rent have to keep pace with the market?

Yes. IHTM14335 says it does not matter whether the giver’s benefit started at the time of the gift or later, or whether it was continuous: if at any time in the relevant period full consideration is not paid, the reservation rules apply. HMRC’s example is a father who gives his freehold to his son and takes a lease at a full market rent with regular reviews. The rent is paid for ten years but then not reviewed as the lease requires and stops being commercial. He dies fifteen years after the gift, and the home is treated as a gift with reservation.

The lesson is that a good start is not enough. Reviews must be carried out when they fall due, the new rent must be paid, and the evidence kept for executors.

What happens if the rent stops, or only starts later?

If the parent stops paying full rent and keeps living there, the reservation rules apply from that point. HMRC’s guidance on gifts says a gift with reservation is taxed at its market value at the date of death, as if the parent still owned it, however long ago the gift was made.

The reverse also works. If a parent first lives rent free and later starts paying full rent, the reservation ends on that date and the parent is treated as making a potentially exempt transfer then (section 102(4)). IHTM14343 says the annual exemption cannot reduce that deemed transfer. HMRC’s own example: John gives his son his house worth £450,000 in July 2014 and lives there rent free. He starts paying market rent in July 2016, when the house is worth £475,000, and dies in February 2021. The deemed gift of £475,000 was made five years and five months before death, so it is chargeable, with taper relief reducing the rate on the excess over the threshold to 16%.

How is the rent taxed?

The child is now a landlord. GOV.UK explains that the first £1,000 of property income is covered by the property allowance, and rental income must go on a Self Assessment tax return if it is more than £2,500 after allowable expenses or £10,000 before expenses. Because the rent is commercial, the restrictions on expenses that apply to letting to family below market rent should not arise; see how rental income is taxed.

For the parent, the rent is a payment for their home, not a gift. A side effect is that the rent paid over the years leaves the parent’s estate as well. The gift of the house itself has its own Capital Gains Tax position; see gifting a property to your children.

Does the pre owned assets charge apply?

The pre owned assets income tax charge in Schedule 15 to the Finance Act 2004 can apply to someone who gives away an asset and keeps benefiting from it (IHTM44001). For property, the amount charged is the appropriate rental value less any payments the occupier is legally obliged to make to the owner for their occupation (IHTM44010). A full market rent payable under a binding tenancy therefore reduces the charge to nil. Rent paid informally, with no legal obligation, does not count.

Partial rent is a trap. The £5,000 de minimis exemption is tested on the rental value, not on the amount left in charge after rent, so paying half the market rent on a home with a rental value over £5,000 loses the exemption (IHTM44056). See pre owned assets tax.

Are there alternatives to paying rent?

Two. GOV.UK says the parent does not need to pay rent if they give away only part of the home and the new owners also live there. IHTM14332 adds that there must be no collateral benefit to the parent, such as the child agreeing to pay all the running costs. Second, under paragraph 6(1)(b) of Schedule 20, occupation is disregarded where it results from an unforeseen change in the parent’s circumstances, the parent can no longer maintain themselves through old age or infirmity, and the occupation is reasonable provision by a relative for their care and maintenance, as explained at IHTM14342.

How might this work in practice?

Illustration only. Helen gives her house worth £400,000 to her son, has a letting agent value the rent at £1,500 a month, signs a tenancy with review every two years and pays the rent and her own bills from her pension. If she dies nine years later, the house is outside her estate. If she dies five and a half years later, the gift fails as a potentially exempt transfer at its £400,000 value when given; assuming no other gifts and a £325,000 threshold, £75,000 is taxed with taper relief at 16% instead of 40%. The later value of the house is irrelevant.

What mistakes come up most often?

  • Agreeing a rent once and never reviewing it.
  • Paying a token or family rate rather than a full market rent.
  • Paying irregularly or not at all for periods, which restarts the reservation.
  • Having no written tenancy, which also leaves the pre owned assets charge in place.
  • Forgetting that the child must declare the rent.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.