Gifting an asset directly to a loved one or indirectly via a trust can be a really effective way of mitigating Inheritance Tax (IHT).
However, care needs to be taken to make sure that HMRC doesn’t put the kibosh on your well-laid plans.
If they view your action as a “gift with reservation of benefit” then the asset in question will still be viewed as part of your estate for IHT.
What is a gift with reservation of benefit?
Imagine you decide to give your prized bicycle to your friend because you no longer use it.
But there’s a catch: even though you’ve given it away, you still borrow it for your weekend rides in the countryside.
In essence, you’ve given the bicycle away but haven’t entirely let go of it.
That’s the crux of a gift with reservation of benefit (GWROB).
Translating this into more formal terms, a GWROB happens when someone gives away an asset, e.g. property, stocks, a painting, but continues to enjoy some or all of the benefits of that asset.
The classic example is when parents transfer the deed of their house to their children to avoid a hefty inheritance tax bill but continue living in the house rent-free.
They’ve made a gift, but the reservation of benefit is that they’re still using the house.
Gift with reservation of benefit rules
The GWROB rules are an anti-avoidance measure to prevent someone from giving away an asset but continuing to derive some benefit from that asset after the gift has 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 inheritance tax will likely apply to the asset.
GWROB examples
The house example
As mentioned, if you give your house to your children but continue to live there rent-free, it’s a GWROB.
The holiday home
Suppose you give your holiday home to your sibling but reserve the right to use it for a few weeks every year without paying market rates to use it.
This scenario could also be considered a GWROB.
The trust example
In this example, you put a property into trust but you still use it for overnight stays when you are back in the UK.
If you do this too often and don’t pay market rent, this could be a GWROB.
The investment portfolio
You transfer your investment portfolio to another person while retaining the right to any dividends or returns.
This is another form of GWROB.
How to avoid making a gift with reservation of benefit
For a gift to be successful from an IHT planning perspective, there 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 transfer of ownership.
Paying market value rent
Falling foul of gift with reservation of benefit rules can be avoided when market value rent is paid by the donor.
I.e., 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 will not apply.
Exclusions from gift with reservation of benefit rules
In the following cases, gift with reservation of benefit rules will not apply.
- If the 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 the donor gives a house to a donee and either visits the house for domestic reasons or some short-term purpose.
You can visit HMRC’s inheritance tax manual to dig deeper into exclusions.
Navigating GWROB rules: Tips and considerations
💡 Take professional advice
Given the complexity of tax laws and the potential financial implications, seeking professional advice is crucial.
A qualified advisor can help navigate the nuances of GWROB rules, ensuring that your estate planning is both effective and compliant with current laws.
💡 Rent agreements
If you’re considering transferring property but plan to continue living there, establishing a formal rent agreement at market value can help avoid the classification of the property as a GWROB.
💡 Clear documentation
Any transactions considered as gifts should be clearly documented, including the terms of the gift and any agreements related to the reservation of benefit.
This documentation can be vital in clarifying intentions and compliance with tax laws.
💡 Consider alternatives
There are alternative estate planning strategies that can achieve similar objectives without the complications associated with GWROB.
Exploring options like trusts or Family Investment Companies can provide pathways to efficient estate planning.
The bottom line
The concept of a “gift with reservation of benefit” might seem daunting at first, but it’s an important one to understand, especially for those planning their estate.
It’s all about ensuring that when you give something away, you’re genuinely giving it away.
If not, there could be tax implications that might affect your loved ones after you’re gone.
Remember, the goal of estate planning and making gifts is to ensure that your assets go to the people you care about in the most tax-efficient way possible.
Further reading
Using gift allowances to reduce inheritance tax
