Gifts with reservation

Nov 14, 2023 | Tax Tuesday

Estate planning can be a complicated area to navigate, both for you and, eventually, your beneficiaries. It’s understandable that you may want to reduce your taxable estate, so that the inheritance tax obligations of your non-exempt beneficiaries is less later down the line.

A popular route to take can be ‘gifting’ assets to your children, such as property or land. Beware, though, what you may think is a generous gift may eventually give rise to unexpected tax obligations if you’re not careful. If you’re donating a gift to a recipient, typically your children, but actually continue to benefit from it, then it’s vital to consider the tax implications and how this may impact them later down the line. 

With this in mind, this week’s Tax Tuesday instalment takes a look at gifts with reservation (GWR), and how to avoid triggering inheritance tax. 

What is a ‘gift with reservation’?

Under typical inheritance tax (IHT) rules, most lifetime gifts to non-exempt beneficiaries (e.g., your children or friends) are classed as potentially exempt transfers (PETs), meaning that IHT is only chargeable if you were to die within seven years of the transfer. 

This rule causes disagreement in some circumstances, such as that outlined above, whereby a parent donates an asset, such as their main property or land to their child, but continues to live in it (or simply benefit from it) until their death. This is because the intention is often to decrease the value of the taxable estate by making a gift without changing their actual living situation.

According to HMRC, a GWR is one:

  • made by the deceased;
  • of property subject to a reservation;
  • made on or after 18th March 1986; and
  • not an exempt transfer.

If, on the transferor’s death, there is property subject to a reservation, then the property is treated as part of the estate. Alternatively, if the property ceases to be subject to a reservation within seven years of the transferor’s death, then the gift is treated as a PET.

Specific rules

The GWR rules apply if the donor’s use of the gift impedes on the donor’s benefit, so are therefore relatively subjective to individual circumstances. For example, where property is concerned, there are some exceptions to GWR rules; for example, if the donor is babysitting the recipient’s children; staying whilst their own property is undergoing work; or living with the recipient due to convalescence. 

If you are gifting property with the intention of continuing to live there with the recipient, then we would urge you to consider the GWR rules carefully before doing so. To avoid IHT obligations down the line, you would need to pay the recipient rent at full market value and regularly review it to ensure that you’re keeping up with the market.

There are countless different assets that could fall under GWR rules, such as use of a personal library, or receiving lifts in a gifted car. However, if your use and enjoyment of gifted assets does not prevent the recipient from also enjoying it in full, then it will not be seen that you have reserved a benefit. With clear communication and consideration between you and the recipient, unexpected tax obligations can be carefully avoided later down the line.