Gifting Property to Children – Navigating the Gift with Reservation (GWR) Rules
Tax Question
My clients, a husband and wife, are considering gifting one third of their jointly owned property to their child in order to reduce the future inheritance tax liability on their estate. Would this be a viable solution, and could such a gift fall within the scope of the gift with reservation of benefit rules?
Tax Answer
Firstly, what is a gift with reservation?
The gift with reservation of benefit rules were first introduced in Finance Act 1986, S102 https://www.legislation.gov.uk/ukpga/1986/41/section/102. The aim of the new legislation at the time was to prevent a gift which was not really a gift due to the strings attached – i.e. retaining significant benefits from the asset being removed from a donor’s estate entirely after 7 years, under the potentially exempt transfer rules.
If the gift is deemed to be with reservation, it is treated as remaining in the donor’s estate for inheritance tax (IHT) purposes, regardless of how much time has passed since the gift was made. This is supported by HMRC’s guidance on gifts with reservation (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14332).
A good example of this is that parents give their entire main home to a child then continue to live in the property after the gift and pay no rent. For specific examples see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14333.
Legislation was therefore introduced to ensure that the gift would remain in the donor’s estate, the only time the gift could be perfected was if they started paying market rate rent at a later date at which point the 7-year clock would start.
Applying this to our scenario
In order for the potentially exempt transfer not to be a gift with reservation of benefit the following would first have to occur:
Ownership
The donee (son or daughter in this case) would have to be given ownership of their one third, this means a legal or beneficial title transfer such as a transfer of ownership is reported with the land registry.
Right to enjoy the benefit of owning the asset
To avoid GWR, the donee must benefit from their ownership. This can be achieved either by occupying the property themselves or by charging the parents market rate rent for their share. Therefore in our scenario the son or daughter would have to move in with the parents, or they must be able to charge the parents for occupying their one third they now own at a market rate rent charge. HMRC provides an example in https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14335.
The caveat to this is if the market rate rent is being charged or they move in with the parents they should also suffer the liabilities an owner would have, this means that they should pay their one third of all running costs for the property.
The practical application of running costs and ownership liabilities can be found in https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14336.
The significant loss of the Residence Nil Rate Band
Giving a simpler scenario whereby a son or daughter was given the entire ownership of a single parents home, how would the gift with reservation and the Residence nil rate band interact with each other?
In our example the property was worth £400,000 and the single parent gifted the property to their child two years before death but continued to live there rent free triggering the gift with reservation of benefit rules.
HMRC Manual https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm46001 reiterates that the RNRB “is only applied against the estate on death. RNRB is not taken into account when working out the tax due on the value of chargeable lifetime transfers or failed potentially exempt transfers(PETS).”
That is because those earlier transfers are taxed under s7 without reference to s 8D; they have their own “value transferred” and cannot benefit from an allowance that is legislatively ring-fenced to the death estate.
This would mean that the failed PET of £400,000 would first be set off against any nil rate band remaining assuming that £325,000 was still available, this would leave £75,000 subject to inheritance tax at 40%.
If you’re advising clients on property gifts or succession planning and want to ensure compliance with GWR rules while maximising IHT efficiency, contact us for a tailored consultation.
Tax Advisor
Gavin Anderson
For more information, please contact us at: consultancy@vantagefeeprotect.com
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