HM Revenue & Customs (HMRC) has identified 461 cases involving gifts worth £156m that may still be liable for IHT because the person making the gift continued to benefit from the asset.
These arrangements, known as 'gifts with reservation of benefit', can leave families facing an unexpected tax bill after a loved one's death. Understanding the rules is essential if you are considering gifting property or other valuable assets as part of your estate planning.
What is a gift with reservation of benefit?
A gift with reservation of benefit occurs when you give away an asset but continue to benefit from it. Although legal ownership may have changed, HMRC can still treat the asset as part of your estate when calculating IHT.
Common examples include:
- Gifting your home but continuing to live there: transferring your property to your children while continuing to occupy it without paying an appropriate market rent.
- Gifting a holiday home but continuing to use it: giving ownership to family members while retaining the right to use the property without making appropriate arrangements.
- Gifting shares but retaining the income: transferring shares to your children or grandchildren while continuing to receive dividends.
- Gifting valuable possessions but continuing to enjoy them: giving away artwork or other valuable items while keeping them in your home and continuing to use them.
The key issue is whether you have genuinely given up the benefit of the asset, rather than simply transferring its ownership on paper.
Why can these gifts lead to an unexpected IHT bill?
Normally, a gift to an individual may become exempt from IHT if you survive for seven years after making it, subject to the relevant rules and exemptions.
However, the seven-year rule does not automatically protect a gift with reservation of benefit. If you continue to benefit from the asset, it may remain within your estate for IHT purposes, even if you survive for many years after making the gift.
For example, if you give your home to your children but continue living there without paying the appropriate market rent, the property may still be included in your estate when you die, even if the gift was made decades earlier.
HMRC's figures highlight the potential scale of the issue. The gifts identified averaged approximately £338,000 per estate, meaning families could face substantial unexpected tax liabilities.
Can you give away your home and continue living in it?
It may be possible, but the rules are strict.
If you give your home to your children and continue living there, you will generally need to pay a full market rent to avoid the gift being treated as a gift with reservation of benefit. The rent should reflect the property's market rental value, and the arrangement must operate in practice, not simply exist on paper.
The rent will normally be taxable income for your children. It is also important to keep payments up to date and review the rent as market conditions change. If payments stop or the rent is no longer appropriate, the property could fall within your taxable estate.
This means gifting your home is not necessarily a straightforward way to reduce IHT while continuing to live in it. The potential tax benefits must be weighed against the ongoing costs and practical implications.
When can you benefit from an asset you have gifted?
There are circumstances in which you can give away a share of an asset while continuing to enjoy it, provided the relevant conditions are met.
One example is genuine shared occupation of a home by parents and their children.
Where parents and children genuinely live together in the same property, the parents may be able to gift a share of the home to their children while continuing to occupy it without the arrangement being treated as a gift with reservation of benefit.
The arrangement must reflect genuine shared occupation, with household expenses such as utilities, maintenance and repairs shared appropriately. The person making the gift must not continue to receive an additional benefit from the recipient, such as subsidised living arrangements.
This can be particularly relevant as multigenerational living becomes more common. However, shared ownership can have wider implications, including how the property could be sold, the children's financial circumstances and what happens if one party wishes to move out.
These issues should be considered before any transfer takes place.
Is gifting still an effective way to reduce IHT?
Yes. Gifting can remain a valuable part of estate planning, allowing you to support family members during your lifetime while potentially reducing the value of your estate. It may become increasingly important for families considering their exposure to IHT as tax rules change.
However, the outcome depends on the type of asset, how the gift is structured, whether you continue to benefit from it and your wider circumstances. Other taxes, including Capital Gains Tax and Stamp Duty Land Tax where applicable, may also need to be considered.
You should also think carefully about the non-tax consequences. Giving away an asset means surrendering some or all of your ownership and control. It is important to ensure that any gift will not compromise your future financial security or create difficulties for your family.
How can you avoid problems when making a gift?
Before transferring property or other valuable assets, consider the following:
- Be clear about your objectives. Decide whether you want to reduce a potential IHT liability, help family members financially or achieve both.
- Understand the rules. Do not assume that transferring legal ownership will automatically remove an asset from your estate.
- Consider ongoing benefits. If you intend to continue using the asset or receiving income from it, check whether this could create a gift with reservation of benefit.
- Understand the wider implications. Consider other taxes, ongoing costs and the impact on your financial security and family relationships.
- Review arrangements regularly. Where a gift involves rent payments or shared occupation, ensure the arrangements continue to meet the relevant requirements.
Professional advice can help you assess the options and put appropriate arrangements in place before making a gift.
How TWM Solicitors can help
Gifting assets can be an effective way to support your family and plan for a potential IHT liability, but the arrangements need to be right from the outset.
Our Private Client team advises clients on estate planning and the tax implications of transferring assets during their lifetime. We can help you assess whether gifting is appropriate for your circumstances, understand the relevant rules and consider how best to protect your interests and those of your family.
Contact our Private Client team to discuss your options.