Inheritance Tax (IHT) planning is a complex area, and one of the key concepts to understand is a Gift with Reservation of Benefit (GWRB). This rule is designed to prevent people from giving away a variety of assets to avoid IHT while still enjoying the benefits of those assets. If you make a gift but continue to derive a benefit from it, HMRC may still consider the asset to be part of your estate upon your death.
The fundamental principle is that for a gift to be truly effective for IHT purposes, the donor must give away full ownership and completely relinquish all control and benefit. If the donor does not, the gift will be ignored, and the asset will be treated as if the donor still owned it at the date of their death.
Common examples of GWRBs:
- Primary home: giving a house to a child, but the donor continues to live there rent-free.
- A holiday home: gifting a caravan or a holiday cottage, but the donor still uses it for their holidays without paying.
- Valuable possessions: transferring ownership of a valuable painting or piece of furniture but keeping it on display in your home.
How do GWRBs affect IHT planning?
The distinction between GWRB and a standard gift is crucial. A typical gift between individuals, known as a Potentially Exempt Transfer (PET), becomes fully exempt from IHT if you survive for seven years after making it. This is often referred to as the “seven-year rule.”
However, a GWRB is fundamentally different as the gifted asset will be treated as if it still forms part of your estate at the time of death if there has been a retention of benefit in the seven years prior to death. This means it will be included in the calculation of your estate’s total value, regardless of the number of years that have passed since the donor made the gift. Such gifts (often the home) are also likely to be ignored by the local authority when assessing whether funding is available for care/nursing home fees.
For example, a gift of the family home from parent to child in 2011 would be a PET and therefore an exempt transfer if the parent moved out when the gift was made until 2018 (seven years). However, if the parent moved back in, in say 2020, and dies in 2025, the relevant period for GWRB purposes would be 2018 to 2025, the seven years prior to death. In this example, the child could not enjoy the property to the exclusion of their parent, so the exempt PET would be ignored, and the value of the family home would form part of the parent’s death estate for IHT purposes (unless the exception, ‘reasonable provision for an infirm relative’ applies), despite the property being legally owned by the child
Continuing with the example above, if the gift was made in 2020 and the parent died in 2025, there will be a failed PET, as the parent did not survive the seven years following the date of the gift. Any IHT on the failed PET will be chargeable on the child, but as there was a GWRB, the personal representatives will also need to include the family home as part of the death estate, upon which IHT may also be due. To avoid a double charge to IHT, HMRC will calculate the IHT due on the failed PET and the IHT due on the value included in the death estate, with the higher amount being charged.
Permanently releasing any reservation of benefit during your lifetime (e.g., moving out of a property that you have previously gifted) will result in a ‘deemed’ PET. You would need to survive for seven years from the date the reservation is lifted for this to fall outside of your estate.
GWRB and lifetime gifts
Your personal representatives are responsible for working out and paying the IHT that is due on the assets included within your estate. This may involve tracing gifts because where the donee disposes of the gifted asset and receives another asset in exchange, which is used/enjoyed by the original donor, a GWRB may again arise. To ensure a smooth process for your personal representatives, it’s vital to keep meticulous records of:
- What you gave and who received it
- The value of the gift at the time it was made
- The date the gift was given
How to avoid a GWRB
While the GWRB rules may seem strict, it is possible to make a genuine gift and avoid these provisions. The key is to ensure that the donee (the person receiving the gift) takes on full possession of the asset and the donor no longer retains any benefit.
- Paying for the benefit at a commercial rate.
If you continue to use or benefit from a gifted asset, the most effective way to avoid a GWRB is to pay the recipient the full market value for that benefit+. This demonstrates that you are not receiving a “free” benefit, and the donee is genuinely able to enjoy the gift.
- Property: Paying a formal, market-rate rent for a house you’ve gifted demonstrates that you, as the donor, are not receiving a “free” benefit. The donee, in turn, genuinely benefits from the gift by receiving the rental income.
+The market rent should be reviewed regularly by a suitably qualified firm/individual to ensure that the rate remains commercial.
- Other assets: This principle extends to other gifts. For instance, if you give a valuable painting to your child but still wish to display it in your home for a period, you could establish a formal rental agreement and pay them a commercial fee for its “loan.” Similarly, if you gift a classic car to a grandchild but still want to drive it on occasion, you could agree to pay a commercial rental fee for its use. Suitable evidence should be retained.
- The “Virtually Excluded” exception
The GWRB provisions may not apply if your continued use or benefit is considered “insignificant” by HMRC. This exception is not about paying for the benefit, but about the benefit itself being so minor that it doesn’t constitute a reservation.
- For all assets: The benefit must be trivial and incidental. For example, staying in a gifted property for a brief holiday or borrowing a gifted item for a single, brief occasion (such as a car for a weekend trip) might fall under this exception. This is a fine line, and a more frequent or regular benefit could be challenged.
How we can help you
Inheritance Tax planning is a crucial step towards securing your legacy and passing your hard-earned wealth to your loved ones. The rules on Gifts with Reservation of Benefit are designed to be strict, but with careful and informed forethought, they can be successfully navigated. If you are considering making a lifetime gift of any asset, we encourage you to contact us today. We have a dedicated IHT, Trusts and Estates department – our specialists are on hand to provide the professional guidance you need to ensure your wishes are carried out without any unwelcome tax surprises.
Email: [email protected]
Phone: 01926 422 292
