How a Gift with Reservation of Benefit Could Mean You Still Have to Pay Inheritance Tax
Surveys have shown that Inheritance tax is one of Britain’s most hated taxes, and many clients come to us every year with concerns about the effect inheritance tax will have on their estate. A popular way to try and cut down inheritance tax is by gifting property to loved ones before death; however, if you are not careful your gift could be classed as a gift with reservation of benefit and you may still get caught out by inheritance tax.
What is a gift with reservation of benefit?
When you give something away as a gift, it is expected that you intend to relinquish all benefit you received from the asset that’s being given away. If you give an asset away and continue to benefit from it in some way, this can be considered a gift with reservation.
A gift with reservation can apply to intangible assets like stocks and shares, expensive personal possessions such as jewellery or antiques, cars or anything else that could be subject to inheritance tax. However, in most cases, a gift with reservation occurs when a parent gifts their home to their child but continues to live there.
What could be considered a gift with reservation?
Some of the reasons why your property may be considered a gift with reservation are:
- If you’ve given your property away to your children but continue to live there without paying rent
- If you purchase a property jointly with your child but fund the purchase completely by yourself, then live in the property by yourself – as your child did not contribute to the purchase, the share of the property they own may count as a gift from you and you are still benefitting by having sole habitation of the property
- If you gift a property to a family member that they do not live in but you stay there for free when you travel (this may include properties overseas)
- If you gift a buy-to-let property to your child but continue to receive some of the rental income
If I sell my property to my child at a reduced price, could this still count as a gift with reservation?
In most cases, yes – if you sell a property to your children for less than its market value (at a “concessional” price), the difference between the property’s full value and the price they paid is considered a gift. Consequently, if you sell them a property at a concessional price and continue to benefit from it, the difference in price could be considered a gift with reservation and inheritance tax may be payable.
When is inheritance tax payable?
You may not need to worry if your estate is under the inheritance tax threshold. At the time of writing, the inheritance tax threshold is £325,000, although this allowance can be increased to £500,000 if you leave your home to your children or grandchildren.
If your estate surpasses your threshold, anything above the threshold is usually taxed at a rate of 40%.
However, you should be aware that gifts given within 7 years of your death may be counted as part of your estate and incur inheritance tax. While none of us can predict the future, it is important to understand that your estate could still incur inheritance tax regardless of your efforts to reduce it. Fortunately, gifts made within 3-6 years before your death will usually be taxed at a lower rate than the 40% standard.
You can find more information about inheritance tax on the government website.
How can I avoid my gifted property being considered a gift with reservation?
What you can do depends on what sort of benefit you’re receiving from the property. The most common concern comes from parents who want to give their property to their children and still live in it themselves, but do not want to give a gift with reservation. If this is the case, you can avoid the property being classed as a gift with reservation by:
- Paying rent in line with local rates
- Contributing to the bills
You may not need to do this if you only transfer a part of your property to your children and they live in the property with you. You can transfer a share in your property to someone else using a transfer of equity.
You may wish to discuss this with a transfer of equity solicitor.
Are any other taxes payable when gifting a property?
If the property you have given away is your main residence (as long as it has never been let or used for business), inheritance tax would usually be the only tax you would need to worry about. However, if you are gifting a property that isn’t your main home (such as a buy-to-let or a holiday home) capital gains tax may be payable.
Our sister company Starck Uberoi Wealth can advise on reducing your tax liability. Arrange an appointment by calling 020 8037 4027.
Would it be considered a gift with reservation if I gift property to my children to reduce my care fees?
No, but doing so is a risky strategy – if you give your property to your children in order to qualify for state-funded care, this may be considered “deliberate deprivation of assets.” Should this happen, the property may be taken into account when calculating the cost of your care, even though you will not be able to sell or let the property in order to fund the costs. Read more about The Dangers of Transferring Property to your Children in our blog.
How Starck Uberoi can help
Whatever you decide to do, we are here to help. Our conveyancing team has extensive experience in handling all sorts of transfers, whether you decide to gift a property, pass it on in your will or transfer equity instead. They can answer any questions you may have about avoiding a gift with reservation and help you reach a solution easily and quickly. If you’re transferring equity, you can even receive a free online conveyancing quote on our website in just a few clicks.
Furthermore, Starck Uberoi Wealth offer expert financial advice on how you can reduce your tax liability in a variety of different ways, as well as advice on investments and succession planning. They can help you find more ways to ensure your loved ones benefit in the way you wish, without most of your estate ending up in the taxman’s pocket. Book an appointment with their chartered financial planning department by calling 020 8037 4027 or emailing info@suwealth.co.uk.
To book an appointment, please call 020 8840 6640 or email solicitor@starckuberoi.co.uk. Our offices are located in Brentford, Ealing, London Belgravia and Canterbury, all of which can be easily accessed by public transport. Our managing partner, Raminder Singh Uberoi, can also provide a Notary Public service at any of our London offices.
