When dealing with an estate which is subject to Inheritance Tax, we are often asked to advise on what constitutes a Reservation of Benefit.
The reason this question is important, is that gifts made by the deceased up to 7 years before the date death can be exempt from, or be subject to a lower rate of tax. However, this relief from tax can be lost if there is a Reservation of Benefit. There are numerous instances where a reservation might apply, depending on the type of asset gifted by the deceased.
The easiest example is the gift of the deceased’s house. For example, the house is transferred free of charge to the deceased’s children, but the deceased continues to reside in the property without payment of rent to the children. Clearly, the deceased in this instance has continued to enjoy the property after making the “gift”, and therefore, any relief from tax is lost. The position would be different, if the deceased paid a market rent back to the children.
If you are dealing with an estate which is, or might be, subject to tax, but you are claiming relief for a gift made 7 years before the date of death, you must check that there was no element of a reservation of benefit, to ensure that the relief is fully available.
About the author
Roger Pratt is a Partner and Head of the Private Client Department of Hopkins Solicitors LLP, and a member of the Society of Trust and Estate Practitioners. If you have a legal question on Wills, Probate, Intestacy, Trusts or any related matter, please contact Roger.