Implications of Gifting Property
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You’ll need to consider Gift with Reservation of Benefit.
If you are a parent contemplating transferring property to your children in order to reduce the value of your estate and potentially lower inheritance tax (IHT) liability, it’s important to understand the concept of a gift with reservation of benefit.
Many people seek to reduce the size of their estate during their lifetime to minimise the inheritance tax liability upon death. One way to do this is by gifting parts of the estate while still alive. However, it’s crucial to note that gifting does not automatically exempt the gift from inheritance tax. If you make a gift but retain some benefit from it, the gift may still be considered part of your estate for inheritance tax purposes.
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Potentially Exempt Transfers
When you make a gift during your lifetime, it is known as a potentially exempt transfer (PET). PETs become completely exempt from inheritance tax if the donor survives for seven years after making the gift. If the donor dies within the seven-year window, the gift may be subject to inheritance tax.
What is a Gift with Reservation of Benefit?
A gift with reservation of benefit (GROB) occurs when you make a gift but continue to derive some benefit from it. For example, if a parent gifts their home to their children but continues to live in the property, this is a gift with reservation of benefit. In such cases, the donor is said to have “reserved a benefit” from the gift, meaning the gift is still treated as part of their estate for inheritance tax purposes.
Types of Lifetime Gifts
Lifetime gifts can include:
- Money
- Personal chattels (e.g., jewellery, art, cars)
- Property (land, houses)
- Stocks and shares
It’s important to note that selling something to someone for less than its market value is also considered a gift. For example, if you sell your house to your child for £200,000 when it’s worth £300,000, the difference of £100,000 is considered a gift for tax purposes.
Who pays Inheritance Tax on Lifetime Gifts?
If a donor dies within seven years of making a gift with reservation of benefit, the responsibility for paying inheritance tax falls on the estate.
How Will HMRC Know About These Gifts?
A common question is, “How will HMRC find out about these gifts?” As an executor or administrator of an estate, you have a legal duty to ask questions and thoroughly investigate the estate’s assets, including any lifetime gifts. Failing to report the gift or pay the tax can lead to penalties and interest charges.
How to Avoid Gift with Reservation of Benefit
If a parent wishes to avoid gift with reservation of benefit when gifting property to a child, they must ensure they no longer derive any benefit from the property. One way to do this is by paying market rent to the child. A formal rental valuation should be obtained to ensure the rent is at market rate, and the parent must pay the rent to show that they are not benefiting from the gift.
However, this may not always be practical. It may be that the parent cannot afford to pay the rent. The child would also be required to pay income tax on the rental income making the situation becomes more complex. In such cases, it is crucial to carefully consider the potential tax implications before proceeding with the gift.
Conclusion
If you are considering gifting property or other assets to your children or other family members, you must be aware of the rules around gifts with reservation of benefit. Simply gifting property does not guarantee that it will be excluded from your estate for inheritance tax purposes, particularly if you continue to benefit from it.
It is always important to seek legal advice. Wilson Browne’s team of Wills, Trusts, and probate solicitors can help you further.
For more information, don’t hesitate to get in touch with a team member today.