A simple act of generosity in your lifetime can be a relatively easy way of transferring wealth out of your estate before you die.
So long as you survive seven years, or the gift falls within one of HMRC’s tax-free allowances, there shouldn’t be any inheritance tax to pay.
But while giving money away is usually a straightforward transaction, it becomes a lot more complicated if you want to give away more tangible assets, such as property, jewellery or a cherished piece of art.
Some 220 gifts worth £61m broke HMRC rules in the 2023-24 tax year, triggering a surprise tax bill for the affected families, according to TWM Solicitors.
That’s because the people who gave the gifts breached so-called “gift with reservation of benefit rules”, and continued to get some “use” of the item they had given away.
Here, Telegraph Money looks at what you need to know before you give assets away, and lifts the lid on some of the more bizarre rules that could cause your tax-saving plans to unravel.
What are gifts with reservation of benefit rules?
If you decide to give something away in a bid to reduce the size of your estate, and resulting inheritance tax bill, you need to give it away wholly, and get no further benefit from the asset.
Mark Chandler, a financial planner at Shackleton Advisers, explained: “Where a gift is made, and the donor continues to benefit in some way from the asset, a benefit is being ‘reserved’. In this respect, although the gift remains a legal transfer, it remains inside the donor’s estate for inheritance tax purposes. This would result in a 40pc tax charge upon the death of the donor.”
The problem, however, is that what you might consider to be a benefit is likely to be very different to the taxman.
“This is where things get strange, sometimes very strange,” said David Little, a financial planning partner at Evelyn Partners. “Because the rules don’t just target obvious abuses – they can apply to everyday human behaviour, which often catches well-meaning people out.”
Jump to: Giving away …
Giving away the family home and continuing to live in it rent-free is a clear breach of gift with reservation of benefit rules – it’s clear you haven’t really given the property away.
To get the asset out of your estate, you would either have to move out entirely, or your children would need to become your landlords and charge you a full market rent (a “friends and family” rate wouldn’t cut it).
But, even if you do move out and find alternative accommodation, you might be surprised by some of the restrictions HMRC would impose.
Mr Little said that there are a number of grey areas that could catch you out:
- Staying overnight occasionally: probably fine
- Staying regularly: harder to defend
- Keeping possessions in the loft: potentially a problem
- Having a key and coming and going freely: that starts to look like continued occupation.
“There is even guidance in HMRC manuals (IHTM14333) suggesting that repeatedly returning to access personal belongings could indicate a continuing benefit – and a ‘gift with reservation of benefit’,” he said.
“The often-cited example – borderline absurd, but grounded in real guidance – is that repeatedly visiting a property to retrieve items (famously, ‘borrowing books’) could cumulatively point to a reservation of benefit.
“It’s not about the books. It’s about the pattern.”
