It is possible to escape inheritance tax on gifts by surviving for seven years after the date of the gift. However, the benefit of making lifetime gifts may be lost if the gift comes with strings attached.
Gifts with reservation of benefit rules
The gifts with reservation (GWR) provisions are anti-avoidance provisions, which are designed to target arrangements whereby the donor gives an asset away but continues to have the use of enjoyment of an asset. This would be the case where, say, a mother gave her home to her daughter and continued to live in it rent-free.
Impact of the rules
The GWR rules negate the benefit of making a potentially exempt transfer (PET) and where the donor retains a benefit caught by the rules, their estate will have to pay inheritance tax on the gift, even if the donor lives for seven years (or more) after making the gift.
If the reservation of benefit is lifted (say the mother moves out), the gift become as PET from the date from which there ceases to be a benefit and the seven-year clock starts running.
However, if you give away your home and move away, you can still make short visits to stay in the property without triggering the GWR rules. Using the example of a mother giving her home to her daughter, if the mother moved away, for example to live in a care home, and stayed with her daughter in her former home occasionally, the rules will not apply and the gift will be a PET.
Paying market rent
It is also possible to escape the GWR rules by giving away your home and continuing to live in it, if you pay a market rent to the recipient. This can be a useful strategy. However, it is important that the rent paid is at the market rate. Paying a notional rent will not prevent the GWR rules from biting. Also, the recipient will be liable for income tax on the rent received.
When considering giving your home away, possibly as a strategy to save inheritance tax, it is worth remembering that you will no longer be the legal owner and even if you plan to rent it from your children, it is possible that if you fall out they may decide to sell it, leaving you without a home. Also, should you outlive the recipient, the house will form part of their estate and will be passed on in accordance with their will (or intestacy laws if they have not made a will). You will also need to be careful that the gift is not construed as a `deliberate deprivation of assets’ in order to avoid paying for residential care.
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