Inheritance tax and gifts with reservation of benefit

If someone makes a gift of an asset during their lifetime but continues to derive benefit from it (for instance if a parent gifts their house to a child but continues to live in it) or if the recipient of the gift does not enjoy possession of the gift, then it will be a gift with reservation of benefit (GROB).

In such circumstances, the property subject to a reservation is treated as still owned by the donor, and so remains part of their estate for inheritance tax (IHT) purposes.

Exceptions

There are some exceptions to the GROB rules in respect of land.

Where there is gift of an undivided share of an interest in land (that is of a share where the land is owned by the donor with another or others as tenants in common, for example where a husband and wife each own a 50% interest in the land rather than the whole land jointly) and a benefit is retained by the donor, then the GROB rules will apply as normal unless:

  • the donor occupies the land to the exclusion of the donee in return for a market rent; or

  • the donor and the donee occupy the land together and the donor does not receive any significant additional benefit (for example where a parent gives half of their house to their child who still lives at the property with them); or

  • the donor does not occupy the land (for example because the land is rented out).

Inheritance tax planning

The last exception mentioned above is particularly useful and could enable an individual to make a gift of a share of a rental property, usually to a trust, and still retain the right to the relevant share of the rental income from it without the gift being a GROB.

The share of the property gifted would not be subject to IHT in due course so long as the donor survives for seven years from the date of the gift.

Conclusion

There are some useful exceptions to the GROB rules where land is owned as tenants in common (and each person consequently owns a separate share of the property). It is, however, important to note the following:

  1. the exceptions remain subject to the donor surviving seven years from the date of the gift. It is therefore important for a donor to consider any tax planning as early as possible whilst ensuring they have sufficient resources to make the gift.

  2. tax legislation is constantly changing and evolving so there is no guarantee that the current exceptions will not be affected by a future change in the law.

  3. where a gift of a share of property is made and its value has increased over and above the original purchase price, such a gain will be liable for capital gains tax (CGT) unless the property has been the donor’s main residence throughout their ownership of it.

    The planning relating to a gift of a share of a property not occupied by the donor might therefore only be appropriate where the gains are covered by their CGT allowance or where the potential CGT liability is manageable.

About the author

Eamonn Daly Partner

Eamonn specialises in tax, estate planning and trust advice for individuals and families providing pragmatic solutions to help them overcome complicated issues and achieve what they want to do.