The inheritance tax (IHT) ‘gifts with reservation’ (GWR) provisions are anti-avoidance rules. They are basically designed to prevent ‘cake and eat it’ situations (i.e., giving away an asset in the hope of surviving at least seven years in order for the gift to become exempt from IHT, but continuing to use or enjoy the asset during all or part of that period).
If ‘caught’ by the GWR rules, the gifted asset is treated as forming part of the deceased’s death estate for IHT purposes (FA 1986, s 102(3)).
GWR ‘let outs’
There are various exclusions and exceptions from the GWR provisions. For example, certain transfers are exempt, such as most gifts between spouses or civil partners and gifts to charities (see FA 1986, s 102(5)). In addition, if an individual receives full consideration for land (or chattels), there should generally be no GWR (i.e., as there is no ‘gift’ as such).
For example, if an individual gives away their home but continues living there, no GWR should arise if the donor pays a full market rent throughout their period of occupation.
Another example of a possible let-out is aimed at preventing a GWR charge due to unexpected and unfortunate changes in circumstances involving family members (FA 1986, Sch 20, para 6(1)(b)).
The donor’s occupation of gifted property is disregarded if the following conditions are all satisfied:
- occupation results from an unforeseen change in the donor’s circumstances; and
- the donor has become unable to maintain himself through old age, infirmity or otherwise; and
- 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).
Note that these conditions are cumulative, and therefore potentially difficult.
Small slice of the cake?
It may be possible for the donor to continue benefiting from gifted property to a limited extent. Examples of situations where HMRC considers that limited benefits to the donor may be permitted (under FA 1986, s 102(1)(b)) without bringing the GWR provisions into play include the following (see Revenue Interpretation 55):
- a house which becomes the donee’s residence but the donor subsequently stays with the donee for less than one month each year, or in the absence of the donee for not more than two weeks each year;
- social visits (excluding overnight stays by the donor as a guest of the donee) to a house he had given away. According to HMRC, the extent of the social visits should be no greater than visits the donor might be expected to make to the donee’s house in the absence of any gift by the donor;
- a temporary stay for some short-term purpose in a house the donor had previously given away; for example, while the donor convalesces after medical treatment, or looks after a donee convalescing after medical treatment, or while the donor’s own home is being redecorated, or visits to a house for domestic reasons (e.g., babysitting for the donee’s children).
Be careful that the above de minimis benefits do not escalate into something more significant. Otherwise, the GWR provisions may bite (e.g., a house in which the donor begins staying longer and rent-free, such as at weekends).
The above article was first published in Property Tax Insider (August 2020) (www.taxinsider.co.uk).