Due to the restrictions which have been in place over the last year or so, it is perhaps more likely that multiple generations of families will move in together to help care for elderly, vulnerable or young family members. However, in such circumstances, where a home has previously been gifted within the family, it is important to be aware of the ‘gifts with reservation of benefit’ rules to avoid creating an unexpected inheritance tax liability which might otherwise be avoided.
Gifts with Reservation of Benefit
Generally, a lifetime gift will not be subject to inheritance tax on death if the donor lives for at least seven years following the gift. However, a gifted asset may be treated as forming part of the donor’s estate for inheritance tax purposes if they retain a benefit in the property following the gift.
For example, if an individual gifts their house to a child but, after the gift, lives there rent free then they have clearly retained a benefit in the gifted house. The house will be treated as forming part of the donor’s estate for inheritance tax purposes and would be subject to inheritance tax on their death. This may be particularly relevant during “lockdown” situations, if parents plan to move back into a house, previously gifted to a child, to form a larger single household.
There are ways of structuring matters so that the reservation of benefit rules do not apply. For example, there will be no reservation of benefit in the gifted property if there is a formal tenancy agreement in place and market level rent is paid by the donor to live in the house. It is important to ensure that the market rent is properly assessed and reviewed regularly.
The rule also does not apply where the house gifted becomes the donee’s home and the donor stays at the house for less than a month each year with the donee or stays at the house for less than two weeks each year without the donee.
A further exception is where a share of, rather than the whole of, a house is gifted and the donor and donee then both live in the property together, provided the donee does not bear more than his or her fair share of the running costs.
There will also be no reservation of benefit where the donor moves into a gifted property with the donee, who is a relative, because the donor can no longer look after themselves due to age or because the donor has become seriously ill.
There can be unintended inheritance tax consequences where a family home is gifted so it is important to take tax advice before making such gifts, or if considering moving back into a house which has been previously gifted. If you have any questions about the ‘gifts with reservation of benefit’ rules or any related matters, our specialist team are happy to help.