Gifts with Reservation of Benefit: what every client should know

Most people know that giving away assets during your lifetime can be an effective way to reduce the value of your estate for inheritance tax (IHT) purposes. However, there’s an important set of rules, known as the ‘Gift with Reservation of Benefit’ rules, that can catch the unwary.

If you fall foul of them, the gift may be treated as though it never left your estate at all, potentially resulting in an unexpected tax bill after your death.

What is a Gift with Reservation of Benefit?

Put simply, a Gift with Reservation of Benefit (GWROB) arises when you give something away but continue to enjoy a benefit from it. The principle behind the rules is straightforward: if you haven’t truly let go of an asset, HMRC will not treat it as having left your estate for IHT purposes.

When do the rules apply?

A gift will be caught by these rules if either of two conditions is met. First, the person receiving the gift doesn’t actually take full possession and enjoyment of the asset. Second, the asset isn’t enjoyed by the recipient to the entire exclusion, or virtually the entire exclusion, of the person who made the gift.

In other words, if you give something away but retain any significant benefit from it, the gift is likely to be treated as a GWROB.

What are the tax consequences?

If a gift is treated as a GWROB, the asset remains within your estate for IHT purposes when you die, even though legal ownership passed to someone else years earlier. This means IHT may be charged on the value of the asset at the date of your death, which could be significantly more than it was worth when you first made the gift.

Common examples

The most frequently encountered scenario involves property — for example, where a parent gifts their home to their children but continues to live in it rent free. Because the parent still enjoys the benefit of occupation, the property remains in their estate for IHT purposes.

Other examples include gifting an investment portfolio while continuing to receive the income from it, or placing assets in a trust from which you can still benefit as a potential beneficiary.

Are there any exemptions or ways to mitigate the issue?

Yes. If you pay a full market rent or market-rate consideration for your continued use of the asset, the reservation of benefit rules generally will not apply. In the property example above, if the parent pays their children a full open-market rent to continue living in the home, the gift should not be treated as a GWROB.

There are also certain statutory exemptions — for instance, where a parent gifts a property but later moves back in due to old age or infirmity and the arrangement is reasonable in the circumstances.

Careful planning can often achieve legitimate IHT savings without falling foul of these rules, but the margin for error is narrow.

A final word

The GWROB rules are one of the areas where well-intentioned planning can go wrong without proper advice. If you’re thinking of making a significant gift, particularly one involving property or investments you currently use or benefit from, speak to a legal adviser before taking any steps.