The ideal in inheritance tax (IHT) lifetime planning would be for the owner of a main residence to gift the property to another such that the property does not form part of the donors estate but at the same time allowing the donor to remain living in that property.
Unfortunately, the ‘Gift With Reservation Of Benefit’ (GWRB) rules come into play in such an instance. These provisions are designed to catch individuals who aim to reduce their exposure to IHT by making lifetime gifts, surviving seven years, yet continue to have the use or enjoyment of the gifted asset. As such, the transfer of a whole or even part of a property to another whilst the donor remains in residence (i.e. ‘reserves a benefit’) will be caught. If such a transaction takes place the property is treated as remaining within the donor’s estate on death.Exemptions are available but they are necessarily restrictive.
Ones possible exemption is where the gift is made and both the donor and donee occupy the property. The restriction is that the donor must not receive any benefit from occupation other than a negligible one, which in itself must be paid for by the donor.The consideration for this benefit must be in the form of market rent paid in full throughout the period of occupation. The rent paid would need to be reviewed regularly with clauses to this effect being included in the agreement.In addition the expenses of occupation must be shared. It is not necessary for the expenses to be proportionate but the donor must at least bear the full share of the expenses attributable to him or her. It should be noted that the rent will normally constitute taxable income in the hands of the recipient.
Other exemptions include the situation where a freehold is gifted and the donor either takes out a lease on the property at full rent or a lease at full rent had been carved out before making the gift.
There is no requirement for the donor to be completely excluded from visiting the property but therestriction is to one month if the donee is also present or two weeks if not. Should what is termed in the rules as 'unforeseenchange in circumstances' arise then the GWROB rules will be disregarded but only in the situation where the donor has become unable to maintain himself, the occupation represents reasonable provision by the donee for the donor’s care and maintenance, and the donee is a relative of the donor (or his spouse or civil partner).
FA 1986, ss 102-102C, Sch 20).
Revenue Interpretation 55, November 1993
Written by Jennifer Adams for Tax Insider