Saving IHT on death by making a gift and surviving it by 7 years is standard IHT planning approved by statute. However, under Finance Act 1986 s102, when there is a reservation of benefit in gifted property at the date of death, for IHT purposes that property is treated as property to which the donor was entitled at death and is brought into charge regardless of how long the donor has survived the gift.
So, for example, if a parent (‘P’) gives their home to their children but continues to live there without paying a regularly reviewed market rent, the value of the house on P’s death will be chargeable to IHT but, for Capital Gains Tax (‘CGT’) purposes, when the children sell the house, they’ll pay CGT on the increase in value of the house from the date of the gift and not just on the increase in value since P’s death.
And there is more bad news in that for example
- the gifted property remains an asset of the gift recipient so if s/he dies shortly after P there could be a further IHT charge with no possibility of double charges relief;
- on P’s death, on a reservation of benefit asset, the liability to pay IHT falls in the first place on the gift recipient and only on P’s estate after 12 months if the gift recipient has not by then paid the IHT due;
- there is no safe harbour period after which P can enjoy a benefit in the gifted property. The legislation says if ‘at any time in the relevant period the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor and of any benefit to him by contract or otherwise’ it is a gift with reservation and in P’s estate on P’s death. ‘Relevant period’ for these purposes is defined as meaning ‘a period ending on the date of the donor’s death and beginning 7 years before that date or, if it is later, on the date of the gift.’ (s102 Finance Act 1986). The test looks back 7 years from the date of P’s death to determine if there has been a reservation of benefit enjoyed by P in any asset s/he has given away post 18th March 1986. Merely surviving 7 years from the gift does not avoid a gift with reservation problem; and
- under the guidance to local authorities on how to interpret and apply the regulations allowing them to charge P for residential care, the gift is likely to be regarded as a deliberate deprivation of assets with the result that the value of the asset gifted is still assessable in working out P’s contribution to care costs.
If P ceases their reservation of benefit within 7 years of P’s death, P is deemed on that date to make an IHT potentially exempt transfer thus commencing the ‘normal’ IHT 7-year clock.
As a general rule, transfers between spouses are outside the IHT gift with reservation rules. This is not, however, the case where a UK domiciled spouse makes a gift to their foreign domiciled spouse of e.g., shares and the gift recipient for example pays dividends from the shares into a joint bank account with the donor.
There are some statutory let outs/reliefs from the gift with reservation legislation. These include
- P paying the asset owner full consideration in the context of land and/or chattels where P has ‘enjoyment’ of the land or chattel; and
- ‘sharing arrangements’ where
- the donor disposes by way of gift on or after 9th March 1999 of an undivided share of an interest in land;
- the donor and gift recipient together occupy the land; and
- the donor does not receive any benefit other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift. In practice the donor can pay all the running costs of the ‘shared’ house but the donee cannot.
If you have a second home in the UK and adult children and they genuinely share your second home with you on a regular basis, and there is very little likelihood they will go and live abroad/otherwise cease in fact to co-occupy it with you during your lifetime, the sharing arrangement ‘let out’ may be an attractive avenue to consider in the context of IHT planning.
If you want to discuss this or anything else raised in this note with us, please contact Robert Schon. His email is firstname.lastname@example.org and his direct dial is 020 7267 5010