A Guide to Gifts with Reservation of Benefit
When considering what to leave to your loved ones, it’s essential to understand the rules around gifting. Many people believe they can give away property and still use it, but it’s not that straightforward. In this blog, we’ll help untangle the complexities of property ownership and gifting, and look at the key concept of ‘gifts with reservation of benefit’.
Understanding gifts with reservation of benefit
A gift with reservation of benefit occurs when an individual transfers ownership of a property to someone else but continues to benefit from or use that property. In simpler terms, it’s like giving away your cake but still wanting to eat it too! This can include scenarios where a parent transfers their home to their children but continues to live in it without paying rent.
Example
Mr Smith gifts a house to his son Sam, which is worth £475,000. Mr. Smith continues to live in the property without paying rent.
This arrangement falls under the category of a gift with reservation of benefit. Despite transferring ownership to Sam, Mr Smith retains the benefit of residing in the property.
As a result, when Mr Smith passes away, the property will be considered part of his estate for inheritance tax purposes. Its market value will be subject to inheritance tax, which could impact Sam’s inheritance.
What are the rules concerning gifts with reservation of benefit?
Understanding the rules surrounding gifts with reservation of benefit is essential if you’re considering making such an arrangement. Here are some key points to consider:
- Anti-Avoidance Measures
HM Revenue and Customs (HMRC) has implemented anti-avoidance rules to prevent individuals from gifting assets while still retaining benefits from them. These rules aim to ensure that gifts with reservation of benefit are treated appropriately for tax purposes. - Seven-Year Rule
Gifts with reservation of benefit are subject to the seven-year rule for inheritance tax purposes. If the donor survives for seven years after making the gift, it becomes exempt from inheritance tax. However, if the donor retains any benefit from the gifted property, it may still be subject to inheritance tax. - Market Value Consideration
HMRC assesses gifts with reservation of benefit based on their market value at the time of the donor’s death. If the donor continues to benefit from the gifted property until their death, the property will be included in their estate for inheritance tax purposes, and its market value will be subject to taxation.
Paying rent while living in a gifted property
In some cases, the donor may continue to reside in the gifted property after transferring ownership to another party. In such instances, it’s essential to establish a formal arrangement for rent payments to avoid falling foul of the gifts with reservation of benefit rules. Paying rent demonstrates that the donor no longer retains the full benefit of the property and helps mitigate any potential tax implications.
What about gifting property abroad?
Gifts with reservation of benefit can also apply to properties abroad. It’s important to be aware of the relevant tax laws and regulations in both the donor’s country of residence and the location of the gifted property. It’s a good idea to seek professional advice from experts knowledgeable in international tax matters to ensure regulatory compliance and minimise tax liabilities.
Pre-owned asset income tax charge
In addition to inheritance tax considerations, gifts with reservation of benefit may also trigger income tax liabilities under the Pre-Owned Asset Tax (POAT) rules. These rules apply if the donor continues to use the gifted property without paying the market rent. POAT aims to prevent individuals from bypassing inheritance tax by gifting assets while still benefiting from them.
Setting up a gift with reservation of benefit
Setting up a gift with reservation of benefit requires careful planning and legal expertise. Here’s a general outline of the steps involved:
- Seek Professional Advice
Consult with legal and financial experts who specialise in estate planning. They can assess your situation and advise on the most suitable approach. - Drafting Legal Documents
Work with your legal advisor to draft the necessary legal documents, such as a deed of gift or trust deed, outlining the terms and conditions of the arrangement. - Transfer of Ownership
Transfer the ownership of the property to the intended recipient(s) as per the legal documentation. - Establishing Terms
Clearly define the terms of the arrangement, including any conditions or restrictions on the use of the property by the donor. - Regular Reviews
Review the arrangement regularly to ensure it remains suitable and meets your evolving needs and circumstances.
Maintaining a gift with reservation of benefit arrangement
To ensure the long-term viability and effectiveness of a gift with reservation of benefit, it’s essential to keep it properly maintained:
- Regular Reviews
Periodically review the arrangement with your legal and financial advisors to assess its continued suitability and make any necessary adjustments. - Compliance Updates
Stay informed about changes in relevant laws and regulations that may affect the arrangement, and update it accordingly to remain compliant. - Open Communication
Maintain open and transparent communication with all involved parties to address any concerns or issues that may arise over time.
How ELM can help
Gifts with reservation of benefit can be a valuable tool for estate planning and asset transfer, but they require careful consideration and professional guidance to ensure their successful implementation and maintenance.
At ELM Legal Services, we are here to provide expert advice and support to help you navigate this complex aspect of property law and estate planning.
As experts in wills, probate and trusts, we have assisted more than 30,000 clients across England and Wales in crafting personalised wills.
Whether you’re looking to protect your assets, minimise tax liabilities, or provide for loved ones, our team can provide tailored advice and solutions.
Get in touch
For further information on gifts with reservation of benefit, or any future planning, don’t hesitate to call 0117 952 0698 or submit a free, no-obligation enquiry. Our friendly team will be happy to help.
