Many individuals choose to give away assets to family members during their lifetime to reduce the value of their estate – and potentially reduce their inheritance tax (IHT) bill when they die. When done correctly, such gifts can fall outside of the estate and be exempt from IHT.
However, not all gifts are treated equally. HMRC can challenge some of these gifts and treat them as part of the estate, if they have reason to believe the original owner continued to benefit from the gifted asset. In the 2023/24 tax year alone, HMRC investigated 220 such cases. These are essentially ‘gifts gone wrong’, where the donor did not follow the rules. This resulted in an additional £61 million worth of gifts being subject to IHT.
What is a Gift with Reservation of Benefit?
A Gift with Reservation of Benefit (GROB) occurs when an individual transfers legal ownership of an asset but continues to use or enjoy it, for example, gifting a property to a child, but continuing to live in it rent-free.
HMRC does not consider such arrangements as proper gifts. For IHT purposes, if benefit is retained, the asset remains part of the donor’s estate, potentially resulting in an unexpected IHT bill for families.
Common examples of Gifts with Reservation of Benefit
Some typical scenarios that can leave your estate caught out by the Gifts with Reservation of Benefit rules include:
Gifting the family home but continuing to live in it rent-free. Unless full market rent is paid and certain conditions met, HMRC will still consider it as part of your estate.
Transferring a holiday home in the UK but continuing to use it every summer. Continued personal use, even if infrequent, can undermine the effectiveness of the gift.
Gifting a luxury car or vintage wine collection but storing them at your property. If you are still benefiting from the asset, the gift is part of your estate and may be subject to IHT.
Transferring shares in a family business but retaining control over dividends or voting rights. HMRC sees this as not truly giving the shares away. This could become a major issue as HMRC will start to charge IHT on family businesses from April 2026.
Transferring ownership of artwork while keeping it on display at your home. Even if legally owned by someone else, continued display at the donor’s home could ultimately trigger IHT.
Why proper gifting matters
Gifting remains one of the most effective ways to reduce IHT, but only when done correctly. Mistakes are common and often costly. If your goal is to reduce IHT, it is crucial to seek professional advice to ensure any transfers are structured within the rules.
With high inflation, particularly property prices, and the IHT nil-rate band frozen at £325,000 per individual since 2009, more families are being drawn into the IHT net. Had the threshold moved in line with inflation, it would be worth over £500,000 in 2025.
The so-called ‘fiscal drag’ means more estates are subject to inheritance tax. That makes the effective gifting of assets more important than ever.
How TWM Solicitors can help you
At TWM, we provide clear, tailored advice to help you make tax-efficient gift assets without falling foul of IHT rules.
Whether you are passing on a business, holiday home, or valuable items like artwork and cars, we can ensure your gift is structured correctly, so it is not pulled back into your estate.
Understanding the gifting rules now can save your loved ones from unnecessary stress and surprise tax bills.
