Parents and grandparents are rushing to pass on property, cash and investments before a feared tax raid in October’s budget.

Lawyers have reported a surge in large gifts being made by families convinced that the government will target capital gains tax (CGT) and inheritance tax (IHT) to help to plug the multibillion-pound hole in the public finances.

They are racing to transfer assets — including second homes, buy-to-let properties, farmland, businesses, stocks and cash — amid concerns that any tax changes would take immediate effect from October 30. A straightforward transfer of property can take between three and four weeks, so time is running out.

CGT is levied on the profits made from the sale of property (other than your main home); businesses; shares and most possessions worth £6,000 or more. But it is also triggered when an asset is given away, calculated from its gain in value since it was acquired by the person handing it over. The rates of tax paid by the asset donor depend on the type of asset and your income tax rate and it is these that many fear will be raised in the budget.

IHT is charged on your estate when you die. At the moment you get a £325,000 allowance (£500,000 if your estate includes a family home left to a direct descendant and the estate is worth less than £2 million) and any value above that is generally subject to 40 per cent IHT. Large gifts can be given tax-free if they are made seven years before death, subject to strict rules.

Anything left to a spouse or civil partner is exempt from tax, and a partner’s allowances can also be inherited, meaning couples can pass on up to £1 million tax-free.

Fiona Higgott from the Kent law firm Thomson Snell & Passmore said there had been such a sudden increase in clients giving homes to children and grandchildren that its property team was snowed under. “There has definitely been a rush before the budget. These are people who were thinking about giving away property anyway and have moved their plans forward to avoid any potential tax increase next month,” she said.

What will be in the budget?

Labour has promised not to raise taxes on “working people” and ruled out any changes to income tax, VAT and national insurance. It has left the door open for a raid on the taxes that are seen as being paid by the wealthy — including CGT and IHT.

Basic-rate taxpayers pay 10 per cent CGT on most assets and 18 per cent on gains made from residential property. Higher and additional-rate taxpayers pay 20 per cent on most assets and 24 per cent on property. Rachel Reeves is said to be considering raising the rates in line with income tax, which would mean higher and additional taxpayers paying up to 40 per cent and 45 per cent on their profits. Everyone gets a £3,000 CGT-free annual allowance, but this has been eroded over the past two years (it was £12,300 in the 2022-23 tax year) and could change again.

Higgott said a client had rushed to give a buy-to-let property to her grandchildren to avoid a possible £40,000 rise in her CGT bill. The widow had made a £250,000 gain on her £600,000 property. She wanted to give the house, which generates rental income, to her grandchildren because they had lower income tax rates than her children. She was a higher-rate taxpayer with none of her £3,000 annual tax-free allowance remaining and so was taxed at 24 per cent on the £250,000 gain — a total tax bill of £60,000, which she paid in cash.

If she had waited to sell and the chancellor aligns CGT with income tax in the budget, then her CGT rate would have been 40 per cent, putting her tax bill up to at least £100,000.

• The five tax loopholes Rachel Reeves is likely to slam shut

Higgott said: “We are also seeing business owners accelerating plans to give shares in the company to their children and farmers making significant gifts to the next generation in case the IHT reliefs they are entitled to are watered down.”

The urgency is being fuelled by concerns that any change will come fast. When the former chancellor George Osborne increased the rate of CGT for higher and additional-rate taxpayers from 18 per cent to 28 per cent in June 2010, the rise came into force from midnight on the day of the budget.

Giving little or no notice of an increase raises more revenue because taxpayers have no time to sell or give away assets.

Jo Summers from the law firm Jurit LLP said: “We are absolutely seeing an increase in people trying to give away properties before the budget. People were concerned about IHT before Labour got into government, but that is now hitting a fever pitch.

“Our clients are convinced that CGT and IHT are going to go up and many are worried it will happen overnight, rather than in the new financial year in April.”

How to give away a property

Transferring a property into different ownership can be done in three or four weeks but a lot depends on your circumstances and the complexity of the gift.

Anyone who has not yet started the process and is hoping to complete it before the budget in five weeks’ time, is cutting it fine, Higgott said.

“When giving away a property you will need to have it valued for the purposes of CGT and this will be important in the event of any challenges by HM Revenue & Customs. But some are struggling to get a valuation done quickly because there has been such a surge in demand.

“We suggest getting the property valued before you start the process of gifting it as it may be worth more than you anticipated and could lead to a nasty shock later when you are faced with a bigger CGT bill than you had planned.”

• Capital gains tax raid: why landlords are selling up

Some families will approach a few estate agents to value the property and use that figure to calculate CGT, but Higgott said it was best practice to arrange a “red book” valuation by someone registered with the Royal Institute of Chartered Surveyors.

“It is better to be professional with your tax calculations. HMRC is more likely to challenge a value that has been produced by two estate agents.”

For those pushed for time, it is possible to split the process into two stages to ensure you still benefit from the present tax rules. As long as the beneficial interest of a property is transferred to the new owner by October 30 it would count as a gift for tax purposes. You need to use a legal document called a deed of assignment, which transfers rights to another party. It is quicker than completing the transfer of the whole property.

The second stage would be to transfer the legal title, and this could be done after the budget, Higgott said. It is complicated and you should seek professional advice.

The seven-year rule

One of the most valuable IHT reliefs is the seven-year rule, which allows certain gifts to be made tax-free if the donor lives for at least seven years after making them. If they die within three years the gift becomes part of their estate for IHT purposes and tax is charged at 40 per cent. If they die between three and seven years later it is charged on a sliding scale from 32 to 8 per cent, depending on when they died.

Alexa Collis from the law firm Harbottle & Lewis said many clients were making gifts now to start the seven-year clock running in case the relief was abolished or the seven-year rule extended in the budget. “I would be really surprised if the chancellor introduced any changes to the seven-year rule that was retrospective, so people are making gifts now. But it’s really important not to rush these decisions,” Collis said. “Passing a large amount to adult children, especially those in their twenties, is a big decision and no tax changes have been confirmed yet. Don’t let the tax tail wag the dog.”

She said one client was giving £1 million in cash to their two children, which would exempt the gift from their estate and IHT if they survive for seven years — possibly saving £400,000 in tax.

• A guide to inheritance tax on gifts

Beware of pitfalls

Once a gift has been made and the legal ownership of an asset is transferred to someone else it usually cannot be reversed, so be certain you will not need it in the future — especially if it is likely that you will have to fund significant care costs later in life.

Rushing a gift also increases the risk of falling foul of one of the many pitfalls that could land you with an unnecessary tax bill. Passing down a property is especially complicated and involves much more than simply making the gift and surviving seven years, so it is wise to seek professional advice.

Higgott said: “We have been helping clients who have some fairly chunky gains on the property they are giving away and this is where you need to be careful. If you leave a property to your descendants when you die, then any gain is wiped out and reset, but giving it in your lifetime means this valuable relief is lost.

“It is important to seek advice and weigh up your options where a big gain is involved. There is a risk that if you give away the property in your lifetime, you trigger a gain and a big CGT bill, and then die within seven years and IHT will also be due. Whereas leaving the property in your will would only have incurred IHT and no CGT bill because of the CGT uplift rule on death,” Higgott said.

The most valuable asset in an estate is likely to be the family home, but it is a common misconception that parents can still live in the property after transferring ownership to their children and reduce their IHT liability.

HMRC would consider this a “gift with reservation”, where the donor continues to benefit from the asset they have given away. In this case, even if they lived for another seven years the property would still be included in their estate for IHT purposes.

To avoid this, a parent who wanted to continue living in the family home would need to pay market rent to whoever they had given the property to. The taxman would want to see a signed rental agreement that specified an annual rent review, and proof of payments that matched similar properties in the area.

Aside from tax technicalities, giving your home to someone else while you still live in it involves relying on the new owner not to sell the property and is not a decision to be taken lightly. Putting the property into a trust could mitigate some of this risk, but comes with its own administrative costs and complexities.