IHT and ‘Gift with Reservation’ rules

September 7th 2023

You want to reduce the potential inheritance tax (IHT) on your estate. An acquaintance has suggested transferring ownership of your home to your children. HMRC rules say that this does not work if you still live in it. Is there a way to legitimately avoid this the rule?  Find out more from Head of Tax Christiaan Hansen.

Usually, when you give away an asset to another person, the value ceases to be part of your estate for inheritance tax (IHT) purposes after seven years, after which it’s exempt. However, if you continue to benefit from the asset, for example you transfer ownership of your home but continue to live in it, the gift with reservation benefit (GWR) anti-avoidance rules mean that the asset stays part of your estate for IHT purposes.

If you cease to benefit from an asset you gave away, the seven-year exemption period starts at that point.

Gift and rent
One way to get around the GWR rules is to pay rent for your home to the person you transferred it to. Let’s assume it’s your children. The gift will then be a potentially exempt transfer (PET), outside your estate after seven years. You need to ensure you pay full market rent; anything less will mean that GWR rules still apply. Ask an estate agent for a rental value, the rent will need to be reviewed regularly and adjusted as necessary, or the GWR rules will apply as soon as the rent falls below a market level and reset the seven-year clock to zero.

There are pros and cons to the rental solution. If you have sufficient income or savings to make the payments from, this will further reduce the assets in your estate and potentially the IHT. However, the income will be taxable for your children. There’s also a small risk, that because your children own the property they might potentially sell it over your head.

An alternative solution?
There’s a far better outcome if one or more of the children live in the property with you. You achieve this by giving them a share of the property, thus making them a joint owner with you. In these circumstances the transfer counts as a PET and the seven-year exemption clock starts immediately. To do this effectively, you will need to set up the ownership as tenants in common.

Margaret lives with her elderly mother who owns the home. It’s worth £900,000 and her total estate is £2.5 million. She transfers a 75% share of the ownership to Margaret. If the mother dies within seven years of the transfer, there is no GWR because Margaret is also living in the property. For this to work, Margaret must not pay all the bills, they should be split or her mother should continue to pay them. If Margaret paid all the bills the rules say that her mother is receiving a benefit from the gift. There’s a double IHT saving for the mother’s estate because the gift means it qualifies for the residence nil rate band (RNRB).

If you give away your home but continue to use it, for example if you live in it, it remains part of your estate for IHT purposes. You can avoid this trap by paying full rent to your children. An alternative solution is for one or more of your children to live with you in the property. Gift them a share of the ownership as a tenant in common.

For further information related to this topic or similar enquiries please do contact our team.