You may wish to make a lifetime gift to your loved ones for saving them from Inheritance Tax (IHT) at a later stage. However, if you would still want to benefit from the gifted asset, you would have to be aware of its implications.
A gift with reservation of benefit refers to a situation where a person gives away property, but still retains some right or benefit over it. For example, someone might give away their house to their children, and would like to live there.
Gift with Reservation of Benefit Rules
The ‘gifts with reservation of benefit’ rules are an anti-avoidance measure to prevent a donor from giving away an asset but continuing to derive some benefit from that asset after the gift had taken place.
If a person makes a gift and continues to derive benefit from the gift, the gift will not be considered a full transfer of ownership and the Gift with Reservation of Benefit 7 year rule for inheritance tax will not apply.
How do Gifts with Reservation of Benefit affect the lifetime gift?
In order for a gift to be considered a potentially exempt transfer (PET), it must be a full transfer of ownership and the person who made the gift must give up all control or benefit over the property. If there is any reservation of benefit, the gift will not be considered a PET and may still be subject to inheritance tax.
The effect of a GWROB is to treat the asset as still forming part of the donor’s estate at the date of death – i.e. we pretend that the donor still owns the asset at their death.
Case 1:
Assume that a donor gives a house to his son when it is worth £500,000.
This is a Potentially Exempt Transfer and will become exempt if the donor survives seven years.
The donor continues to occupy the property after he has given it away. This is a typical GWROB situation and the anti-avoidance rules will apply.
Assume that the donor continues to live in the property until the date of their death. The effect of the Gift with Reservation of Benefit (GWROB) rules is to treat the house as still being in the death estate of the donor. Therefore, the market value of the house at the date of death will be charged to inheritance tax.
If you’re considering making a lifetime gift, it’s crucial to understand the implications of inheritance tax.
Our comprehensive guide on Inheritance Tax Planning can provide you with the information you need to make informed decisions.
How to Avoid Gift with Reservation of Benefit?
The GWROB rules will not apply in the following situations:
Paying Market Value Rent by the Donor to the Donee
If the donor continues to use an asset after they have given it away, but they pay a full market rent to the recipient for the use of the asset, the gift with reservation provisions may not apply.
For the rent to be considered full and commercial, it should reflect the market value of the asset and be reviewed at appropriate intervals to reflect market changes.
In this situation, the gift may be considered a full transfer of ownership and the seven-year rule for inheritance tax may apply.
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Case 2
Mary gifts her home to her son David. She still occupies the house after gift. However, she pays rent of £1,000 per month (market value rent) to David.
In this case, GWROB rules will not apply and it will be considered lifetime gift.
Note: The payment of rent to the donee for the use of the asset will give rise to an income tax charge in the hands of the donee.
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The Donor is Virtually Excluded from Benefiting from the Gifted Asset
Another situation where the Gifts with Reservation of Benefit (GWROB) provisions may not apply is if the donor is virtually excluded from benefiting from the gifted asset. HMRC have confirmed that where the benefit to the donor is ‘insignificant’ in relation to the gifted property, a GWROB will not arise.
The following will not trigger GWROB :
If
A donor gives a house to a donee and the donor stays with the donee for less than one month a year.
If
The donor stays in the house in the absence of the donee for not more than two weeks a year.
If
A donor gives a house to a donee and either visits the house for domestic reasons or for some short-term purpose.
HMRC’s published interpretation also identifies other situations which would not give rise to a GWROB. Make sure to visit HMRC’s inheritance tax manual to dig deeper into exclusions.
Conclusion
It’s important to consider the potential implications of making a gift with reservation of benefit and to seek legal or financial advice if necessary, to ensure that the gift is structured in a way that meets the intended goals and minimises taxes.
To better understand how much inheritance tax may be due in your specific situation, you can use our Inheritance Tax Calculator. This tool can provide you with an estimate based on your specific circumstances.
Additionally, if you have any further additional queries, please don’t hesitate to get in touch with our team at UK Property Accountants.
