HMRC says it has identified £156m worth of gifts in the last year* that may still be liable for Inheritance Tax (IHT) because the donor continued benefiting from the asset after making the gift, according to TWM Solicitors, a leading private wealth and family law firm.
These arrangements, known as ‘gifts with reservation of benefit’, often involve a parent or a grandparent gifting a house or holiday home even though they are still making use of the property.
Other examples include gifting shares to their children or grandchildren while continuing to receive the dividend income or gifting valuable artwork while keeping it in their home.
Approximately 460 estates were identified as having made gifts with reservation of benefit in the last tax year.
Where HMRC determines that a gift falls within these rules, the bereaved family can be hit with an unexpected IHT bill.
The gifts with reservation of benefit identified by HMRC averaged £338,000 per estate – suggesting many involved residential property, valuable artworks or other high-value assets.
Madeleine Beresford, Partner in the Private Client team at TWM says:
“Gifting assets can be an effective way of reducing a future IHT liability, but it’s important that families understand the rules.
“One of the most common mistakes is where someone gives away an asset but continues to benefit from it in some way. In those circumstances, HMRC may still treat the asset as forming part of the estate for IHT purposes.
“With more farms and businesses expected to be exposed to IHT in the future, gifting is likely to become an increasingly important part of estate planning.
“The rules are well established, but they do need to be carefully followed, and professional advice can be invaluable.
“It is commonly reported that those who give away their home and continue to live there must pay the recipient a market rent for their occupation. That income is then taxable in the hands of the beneficiary. What is often misunderstood is that this continues beyond the seven-year period after the gift, and the gift can fall back into the taxable estate even decades later if people don’t keep up with rent payments and rent reviews.”
Circumstances where you can still benefit from a gifted asset
Madeleine says that one area in which you can gift part of a valuable asset while still legitimately making use of it is in shared occupancy of a home.
Where parents and children genuinely share occupation of a residential property, the parents can gift a proportion of that home to their children provided household expenses such as utilities, maintenance and repairs are shared in proportion to the split of ownership.
This needs careful consideration as there can be other unintended consequences of shared ownership that need to be addressed, but particularly with the rise in multigenerational living, this is often a valuable exemption to the rules.
The arrangement must reflect genuine, shared occupation, and the donor must not continue receiving an additional benefit from the doner, such as subsidised living arrangements.
