Fixed Probate Fees, call:

0800 612 6105


Alternatively local rate:

020 8150 2010

Reservation of Benefit

As part of IHT financial planning many clients may be in a position in which they would benefit from gifting property to children during their lifetime to avoid it forming part of their estate on death and incurring an inheritance tax liability. The gift is ‘potentially exempt’ from IHT which means that there is no IHT payable at the time the gift is made and, as long as the donor survives for seven years, the gift will not ’fall back’ into the estate on death. If the donor continues to use the property the taxman views this as ’reserving a benefit’. This rule is strictly construed; s.102(1)(b) of the Finance Act 1986 states that a gift will remain part of the estate unless the donor is ’virtually entirely’ excluded from using or benefiting from it. So what is the solution? You could advise your client to pay the market rate for use of the property however rent for the use of a property could run into thousands of pounds each year. The children receiving the rent however may also have to pay income tax on the rent they receive along with managing the record keeping to make their tax returns. Perhaps a more practical way to avoid a costly IHT bill is to advise gifting a share of the property only so your client retains a share themselves. The gifted share, subject to the seven year rule, will not form part of the estate for IHT purposes. Provided that all parties have use of the property and share the running costs there will be no ‘reservation of benefit’. A statement was made in the Parliamentary journal Hansard on June 10 1986 referring to the IHT on jointly owned property, and gave an example of how Parliament intended the rules to work, it said: …for example, elderly parents make unconditional gifts of undivided shares in their house to their children and the parents and the children occupy the property as their family home, each owner bearing his or her share of the running costs. In these circumstances the parents’ occupation or enjoyment of part of the house they have given away is in return for the similar enjoyment by the children of the other part of the property. Thus the donor’s occupation is for full consideration… The Finance Act 1986 s.102B(1) confirms the approach in the Ministerial Statement. Once the property is transferred into joint names it is important to ensure that all running costs are shared equally. The easiest way to do this is to set up a joint bank account and each party should contribute equally, using the proceeds to cover the running costs. Please note that it is important to remember that a gift is exactly that. It cannot be reclaimed in the future and using property, particularly the family home, for tax saving purposes should always be considered very carefully. There may also be other tax consequences of giving property away.

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0800 612 6105

Or on local rate:

020 8150 2010

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