Gifts with Reservation of Benefit

For a gift to count as a Potentially Exempt Transfer (“PET”) it must be given unreservedly and with no “strings” attached. If the donor continues to use the gift or reserves the right to use it or benefits from it then it will be treated as a “lifetime chargeable transfer” and Inheritance Tax will be payable on it. You cannot, for instance, “give” your art collection to your children and keep it in your house for them. If you give your collection to your children and they can effectively do what they wish with it then it becomes potentially exempt as a gift. It also, however, becomes immediately liable for Capital Gains Tax if it has appreciated in value since you acquired it.
The asset most commonly discussed in this respect is the family home. Because the value of the family home tends to form a large part of most people’s estate it is a common belief that giving it to the children will reduce the value of the estate, possibly avoiding Inheritance Tax completely. As with other PETs this will only be effective if the home is given completely and without reservation of benefit. Exemptions could apply if:
  • you give away the home and move into another house and providing you do not visit the old home too often
  • you give away the home, continue to live in it but pay full market rent to the new owners
  • you give half the home to an adult child living with you and you share the bills – their half will be potentially exempt
  • you sell your home and give the money to your children. If you move in with them the arrangement could still be exempt providing you pay them full market rent. If you do not pay the rent then you may be liable to pay income tax on the rental value
There is no liability for Capital Gains Tax when you give away your primary residence. Giving away a home which is not your primary residence could lead to Capital Gains Tax.
If you suspect that any gifts made by the deceased may have had a reservation of benefit, even if the gifts were made more than seven years before the death, you may wish to consult a solicitor.