The difference between a gift with reservation of benefit and a potentially exempt transfer

When a substantial gift, usually money or property, is made before death, it may still count towards the value of someone’s estate for Inheritance Tax (IHT) purposes. We look at two different types of gift and whether they will attract IHT.

When planning to give gifts to someone during your lifetime, you need to be aware of the possible tax implications.

A gift with reservation of benefit (GROB)

When someone gives a gift but retains some benefit from it, that is classed as a GROB. The most common example is where someone gives their property to their adult children (who live elsewhere) but continues to live in the property rent free. It could also include valuable assets such as art or furniture.

The value of this type of gift is included in the calculation of the value of the estate for IHT purposes.

A potentially exempt transfer

If an asset is given to someone, with no benefit retained, and the person giving the gift survives for seven years after giving it, the asset is not included in any IHT calculation.

However, if they should die within seven years of making the gift, then it will form part of their estate for IHT purposes.

A GROB can become a potentially exempt transfer where, for example, the donor then moves out of the home and retains no benefit in it. At that point, it becomes an outright gift to the beneficiary and if the donor survives for a further seven years, then its value will not be included in IHT calculations.

Exceptions to the GROB rule

If the donor pays full market rent for the property after it is gifted or does not occupy the property, then it will not be classed as a GROB. If the recipient occupies the property with the donor and the donor does not receive any benefit (which can include a contribution to household running costs) then this can also mean that the gift does not have any retained benefit.

Estate planning

The rules around gifts can be complicated and it is recommended that professional advice is taken before trying to distribute assets, particularly if a donor is trying to protect their home from being sold to fund care home fees.

Gifts given in good faith could later attract substantial IHT, which the estate executor or administrator would be required to account for.

An estate planning specialist will be able to identify the best way to ensure that assets are passed to those you would like to benefit from them.

If you would like to talk to one of our Wills and probate experts, ring us on 0117 952 0698 or email us at info@80.244.185.179.

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