Estate Planning Pitfalls: Understanding Gifts with Reservation of Benefit.
When it comes to estate planning, making lifetime gifts, formally known as Potentially Exempt Transfers (PETs), can be a good way of reducing your estate for Inheritance Tax (IHT) purposes.
However, careful consideration needs to begiven before making lifetime gifts as there are various factors to consider, such as whether it is a deliberate deprivation of assets for care fees, whether the assets transferred may be vulnerable to financial/ marital difficulties of the Donee or whether you still actually retain a ‘benefit’ from the assets gifted. Certain lifetime gifts are (currently) automatically discounted for IHT purposes eg. annual £3,000 or gifts to children upon marriage and gifts from surplus income.
However, in general, larger gifts will be subject to a survival period of 7 years after making the gift for them to fall out of their estate for inheritance tax purposes. Although, the 7-year clock will only begin once the person making the gift has completely given up all benefit and enjoyment from the assets being transferred.
One of the main misconceptions with making lifetime gifts is in relation to a person’s home and gifting the whole or part of the property to their children who do not live with them, as a way of trying to reduce their estate for inheritance tax.
For example, Person A in their lifetime gifts Person B their child, the family home. However, after making the gift, Person A continues to live in the family home rent free. The gift of the family home will be categorised as a gift with reservation of benefit (GROB) because Person A continues to benefit from the asset by being able to occupy the family home rent free. The 7-year clock in this example will only begin once Person A either moves out, or if Person A starts paying Person B full market rent for the share that has been gifted. However, if person B is living in the family home, and so taking up their benefit in the gift, then this may not be classed as a GROB but a PET, as described above with a 7-year survivorship provision. However, there are other considerations that need to be taken into account with this scenario such as the age and marital status of the children, potential disagreements for moving home in future, tax complications for the children if they purchased further property.
With the recent change in government, there has been much discussion in the media about the upcoming budget and the potential changes to the gifting arrangements for saving IHT. Capital Gains Tax and its reliefs, which can sometimes be interlinked with IHT have also been discussed as targets to increase the overall taxation on an estate and lifetime gifts.
For bespoke tax planning and advice on the above issues you can email Sophie Fenn at [email protected] or Sophie Raybould on [email protected] or call 0121 733 8000 to speak to either Sophie or one of our experienced solicitors in the Wilkes’ private client team.
