Inheritance tax and Gifts with Reservation

The gift with reservation of benefit anti-avoidance rules were introduced in FA 1986.

These rules are designed to prevent individuals from seeking to reduce their exposure to IHT by making a lifetime gift, which they hope to survive by at least seven years, whilst continuing to have the use or enjoyment of the gifted asset.

They ensure that a donor must genuinely give away all the rewards and benefits of an asset for it to be excluded from their estate for IHT purposes.

If the GWR provisions apply, the gifted asset is generally treated as remaining part of the donor’s estate for IHT purposes.

Furthermore, if the donor releases the reservation sometime after the initial gift and the asset genuinely becomes gifted to the donee, there is a second deemed potentially exempt transfer (“PET”) at this date.

The second PET is not able to use any annual exemptions to reduce its value, but it will not be in the estate of the donor at death if he or she survives more than 7 years after the reservation is released.

Exceptions from the anti-avoidance legislation

Fortunately, there are various exceptions to the general rule that gifts caught by the GWR rules are treated as remaining part of the donor’s estate for IHT purposes.

In the case of gifted land or personal property, the retention of a benefit, i.e. where the donor has actual occupation or enjoyment, is disregarded if he/she pays full consideration in money or money’s worth.

Further exceptions apply for gifts of shares of interests in land.

For example, if a parent gifts an equal interest in a property to their child, so that they become joint owners, there is no gift with reservation broadly if the following conditions are satisfied:

(a)          Parent does not occupy the property; or

(b)          Parent occupies the property and pays a market rent. I.e. if the child lives in another property, not the gifted property, there should be no GWR if the parent pays a genuine full market rent for continued occupation of the gifted share of the property; or

(c)           Parent and child both occupy the property, and parent receives no (or negligible) benefit for the gifted share.

For example, if the child buys all the groceries or pays all the utility bills, the parent would receive a benefit from the asset given away and would continue to be in a reservation of benefit situation.

A change in circumstance

There is a further exception to the GWR provisions in respect of the gift of land, or the share of an interest in it. This applies if the donor occupies the land where the occupation would be disregarded for GWR purposes in the following circumstances:

1. it results from an unforeseen change of circumstances; and
2. the donor has become unable to maintain him/herself through old age, infirmity, etc; and
3. it represents a reasonable provision by the donee for the care and maintenance of the donor; and
4. the donee is a relative of the donor or his/her spouse (or civil partner).

Note that all of the conditions must be satisfied. In addition, in practice it may be difficult to determine what constitutes a ‘reasonable’ provision by the donee for the donor’s care and maintenance.

However, whilst the conditions are fairly comprehensive, the relaxation in the GWR provisions can be helpful in some unfortunate situations.

Practical points

1. If the donor pays a market rent for occupying the gifted property, the rent must be a genuine full commercial rental value and be kept up to date by appropriate market rent reviews on a regular basis. The rental contract should also be made as a proper legal obligation and not a casual promise to pay.
2. It is important to consider any non-IHT implications of sharing arrangements, such as income tax for the recipient of any rents, and capital gains tax implications in respect of the gifted land or property for the donor and the donee, on a subsequent disposal.