Michelle Gavin TEP, partner in the Private Client team at Lodders, explains the pros and cons of gifting a second property to a discretionary trust for UK tax purposes.

Why use a discretionary trust for a second property?

For owners of investment properties or holiday homes, planning for inheritance tax can feel like walking a fine line between keeping control of their property and being tax efficient. One option that often comes up in estate planning is placing a second property into a discretionary trust. It can be a useful strategy, but like most things in tax planning, it has both advantages and drawbacks.

The strategy of gifting a second property to a discretionary trust is predominantly used for holiday homes or rental properties rather than the main residence.

A discretionary trust can offer several benefits. Crucially, it allows trustees to make certain decisions about how to use the trust income. Depending on the trust deed, trustees can decide what gets paid out, which beneficiary receives the payments, how often payments are made, and any conditions to impose on the beneficiaries. Discretionary trusts may be used to put assets aside for a future need, such as for grandchildren, for whom such trusts are particularly tax efficient.

How can a discretionary trust help with inheritance tax?

As outlined above, a discretionary trust offers flexibility, allowing the trustees to decide who benefits and when. This can be a useful way to protect family wealth and support future generations in a way that fits changing needs over time.

Gifting a second property to a discretionary trust can remove the property and any increase in its value from the estate for inheritance tax purposes, but only after seven years. Indeed, gifts to discretionary trusts are subject to the same seven-year rule as other gifts whereby they become exempt from inheritance tax if the individual lives for seven years after making them.

However, putting a property into a discretionary trust counts as a Chargeable Lifetime Transfer. Individuals can use their nil-rate band allowance (currently £325,000) without paying tax straight away, but anything above that is taxed at 20% immediately.

To keep the property fully outside of the estate, the owner cannot use it or benefit from its income in the future as it should not be “settlor interested.” Otherwise, HMRC will treat it as though it is still theirs and this would fall foul of the gift with reservation of benefit (GROB) rules.

Indeed, moving a property into the trust is treated as though it has been sold. Ordinarily, disposing of the property would trigger a Capital Gains Tax bill, however with a gift to a discretionary trust, it is possible to elect “holdover relief” so that the base value of the second property passes to the discretionary trust. The holdover relief claim must be made on HMRC form HS295 within four years from the end of the tax year in which the gift occurred.

It is also important to be aware that discretionary trusts are subject to their own tax rules. This includes potential charges on every 10th anniversary, taxes when assets leave the trust, and higher rates of income tax on income received of up to 45% which includes rental income.

The main income tax benefit of a discretionary trust for grandchildren who are minors is the ability for the minor beneficiary to reclaim the high rate of tax paid by the trustees, effectively utilising the child's personal tax allowances.

What are gift with reservation of benefit (GROB) rules?

Another key consideration to make are the GROB rules. If a property is gifted but the donor continues to stay there, even for short periods, the gift is considered a GROB. Essentially, this means the value of the property remains part of their estate on their death for inheritance tax purposes, regardless of how many years have passed.

If the donor wants to continue to enjoy the property, but wishes to avoid a GROB arising, they must pay full market rent to the trustees for any use of the property. This rent should be kept under regular review and declared as taxable income by the trust.

It is worth noting that, even where full market rent is paid and the GROB rules are avoided, the donor may still fall within the Pre-Owned Asset Tax (POAT) regime. This is an annual income tax charge based on the property’s rental value.

Summary

Placing a property into a discretionary trust is generally best suited to those who are comfortable stepping away from both ownership and future benefit. It is a significant step with long-term implications and complexities that need to be fully understood. Careful consideration, supported by tailored, professional legal advice, is essential to ensure this approach aligns with an individual’s broader estate planning goals.

About the author

Michelle Gavin TEP is a partner in the Private Client team at Lodders. She is one of a small number of recognised practitioners in the Midlands region ranked as a leading lawyer in the Chambers and Partners High Net Worth Guide and is also mentioned in the Legal 500 directory. Michelle is a fully qualified member of the Society of Trust and Estate Practitioners, a fully qualified and accredited member of The Association of Lifetime Lawyers, and a Dementia Friend.

See also

What you need to know about discretionary trusts in wills

All you need to know about the UK Trust Registration Service

How far can an attorney or a deputy go when it comes to gifting?

Find out more

English Housing Survey 2021 to 2022: second homes - fact sheet (GOV.UK)

HS295 Relief for gifts and similar transactions (2024) (GOV.UK)

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Lodders

Publication date

22 December 2025

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.