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Inheritance Tax and effective lifetime gifts

Personal

Countless times we have come across clients who have been unhappy with the prospect of paying Inheritance Tax (IHT).

In order to keep their estate within the Nil Rate Band, they have transferred the legal title of their property to a third party (e.g. children/grandchildren) but continue to reside within the property. As they do not legally own the property, they assume it will not be taken into consideration when calculating IHT upon their death.

After ‘scolding’ them for not seeking legal advice prior to transferring their property, we advise them of the following:
Property that you give away but which you continue to enjoy or benefit from is referred to as a Gift with a reservation of benefit (GROB). Where a GROB exists at the date of your death, the property gifted is treated for IHT purposes as if you retained a beneficial interest in the property and the property is taxed as if it were part of your estate.
In order for a lifetime gift to be fully effective for IHT purposes, you must give the property away without any strings attached.
For example:
Jacqui gives her home to her two adult children who live elsewhere. She transfers the legal title into their joint names.

  1. If Jacqui continues to live at the property rent-free, this is a GROB and the property remains in her estate for IHT purposes.
  2. If Jacqui releases her reservation (for example, by moving out or by paying her children full market rent), this will be deemed potentially exempt transfer (PET) and provided Jacqui survives for seven complete years after releasing the reservation of benefit, the deemed PET will be exempt from IHT.

Certain gifts of property are not within the scope of the GROB rules; these include but are not limited to:-

  • Gifts of an interest in land or a chattel where the reserved benefit is for full consideration,
  • Gifts where you occupy the land because of a change in your circumstances that came about since the date of the gift, and you become unable to maintain yourself through old age, infirmity or otherwise,
  • Gifts made after death that comply with section 142 of IHTA 1984,
  • Gifts that are exempt transfers for IHT.

Prior to making any important legal decisions regarding lifetime planning contact Shivali Kapoor at Wilson Browne Solicitors for a free no obligation discussion.