Beware of the IHT Trap – Gifts With Reservation of Benefit
Beware of the IHT Trap – Gifts With Reservation of Benefits
Planning to give away an asset but still plan on benefitting from it? The Gifts with Reservation of Benefits rules (“GWROB”) are an anti-avoidance provision introduced to prevent avoidance of UK Inheritance Tax (“IHT”).
This article discusses the GWROB rules and certain exceptions where the GWROB rules will not apply. Please note that this article does not discuss the Pre-Owned Asset Charge rules.
What are the GWROB rules?
Traditionally, where a person makes a gift of a property (and is not a chargeable transfer or an exempt transfer), this will cease to be part of their estate if the donor survives 7 years from the gift. This is also known as a Potentially Exempt Transfer (“PET”).
However, the GWROB rules apply where an individual gives away an asset, but they continue to obtain a benefit from the asset that they have gifted.
The idea behind these rules was to prevent an individual giving away an asset, continuing to benefit from this asset and if seven years elapsed before death, no IHT would be chargeable.
Where the GWROB rules apply, the asset will still form part of the donor’s estate on death (at its market value at the date of death).
What are the exceptions to the GWROB Rules?
There are a few exceptions to the GWROB Rules:
- Donor pays full market rent – The GWROB rules will not apply in the circumstances where the donor is continuing to pay full commercial rent for the benefit. This would be the rent charge if being rented by an unrelated third party. The market rent would need to be reviewed on a regular basis to keep up with market trends. This can be hard to explain to the donor as they are unlikely to want to pay market rent.
- Donor is virtually excluded from the property – This is where the use of the asset is insignificant. HMRC Manual IHTM14333 provides some circumstances where the donor can obtain a limited benefit such as:
a. Where there is a property involved, the donor stays with the donee for less than one month a year or stays in the property alone for not more than two weeks.
b. The donor visits the property for domestic reasons such as babysitting.
c. Where a car is involved, where the donee gives occasional lifts to the donor (less than 3 times a month).
As demonstrated from the above, it will need to be assessed on a case-by-case basis.
- Donor releasing the reservation before death – This would be where the donor has released the benefit before the death. However, to avoid individuals simply releasing the reservation before death so that they will not be subject to GWROB, HMRC deem the release of a reservation as a PET at the date of release and the 7-year timing mentioned above starts here.
Due to the extensive coverage of the GWROB rules, some tried to avoid these rules by disposing of the gifted property and subsequently replacing it with different property, and allowing the donor to benefit from this substituted property.
However, in these circumstances the substitution provisions may be applicable. In summary, if the donee ceases to have the possession and enjoyment of any part of the gift, any property received in substitution for the gift is treated as being comprised in the original gift.
The property received in substitution could include:
- Any benefit in relation to consideration for any sale, exchange or disposition;
- For a debt or security, any benefit received by the donee in or towards its satisfaction or redemption; and
- In relation to any right to acquire property, any property acquired in pursuance of that right.
Please note that these tracing provisions do not apply to cash but there could be further IHT consequences of this. There are other rules regarding settled property and tracing not discussed in this article.
The Double Charge to Tax – What is this?
There is an issue because if the GWROB rules apply:
- The original PET will become chargeable if the donor dies within 7 years of the gift; and
- If the donor still has the benefit at the date of the death, it will form part of their estate.
Double charges relief requires two calculations to be performed; one where only the PET is subject to charge and the other where only the GWROB is subject to charge – whichever calculation produces the highest tax liability is used.
Careful consideration is required where the donor will be retaining a benefit in an asset that they are gifting. If you require assistance with any IHT planning or if you believe that the GWROB rules apply to you, please contact a member of our team.
The IHT implications of the GWROB rules are a very complex topic and therefore independent tax advice should be sought to determine whether these rules apply.