Navigating Inheritance Tax Planning: Understanding Gift with Reservation of Benefit (GWRB) Legislation

Tax Question

My mother, who is elderly, has several rental properties that she has owned for many years and we are worried about potential Inheritance Tax (“IHT”) charges on death. However, she will also need the income to continue to support her lifestyle for several years. Is there anything that can be done to potentially mitigate the IHT charges in this situation?

Tax Answer

Inheritance tax planning can be a tricky area, but, as a starting point, giving assets away to the next generation is often the simplest step to reduce the value of an estate.

Generally, if the donor survives seven years from the date of the gift to an individual, then the asset that has been gifted will be outside the scope of inheritance tax. This is known as Potential Exempt Transfer (“PET”).

If we ignore the capital gains tax consequences—which will usually be a big factor in any planning that involves gifting an asset to a relative because capital gains tax is usually based on an assumed market value receipt even if there is no consideration charged—this would allow the asset to be transferred, but under an agreement the donor would retain the right to receive the rental income.

Clearly, this would be too good to be true, and so there are anti-avoidance rules to stop this from working. These are known as the gift with reservation of benefit (“GWRB”) legislation.

They have the general effect of treating an asset as remaining in a person’s estate when they retain a significant benefit from the asset, such as the donor is still receiving the income of the property.

If these rules were applied, then the market values of the properties would remain in the estate of the donor, despite legal title having passed to someone else. This would ultimately undo any benefit of gifting the properties in the first place.

However, all is not lost. If the donor gifts up to 99% of the property away and retains a minimum interest in the property—say 1%—then, as the property is now jointly owned by two individuals who are not spouses, HMRC confirm in PIM1030 that in the absence of a formalised partnership:

Joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

Therefore, it can be agreed by the two beneficial owners of the properties, that the donor can still receive 100% of the rental income despite owning only a small percentage of the property and that the transfer of the 99% is classed as a PET for IHT purposes and the GWRB rules do not apply.

Assuming your mother survives for 7-years after the date of the gift, the transfer of 99% of the property portfolio’s value would be exempt from IHT with only the 1% remaining in her estate at the date of death.

Unfortunately, there will still be a deemed disposal a market value for CGT that cannot be avoided. It would therefore be necessary to assess whether the immediate charge to CGT which would be payable within 60-days of the transfer, outweighs the potential exposure to IHT at death.

As always, professional legal and tax advice should be sought whenever undertaking this type of planning. If you want further help on this topic or to discuss how Vantage can help your clients, please call the advice line.

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