Gifting assets to your loved ones can feel like a generous and heartfelt gesture, and often it is. But without the right planning, those well-intentioned gifts can unexpectedly end up costing your family more than you bargained for.
Lifetime gifting is an effective estate planning tool. Done well, it can reduce the value of your estate and lower the inheritance tax your family might face. But the moment you continue to benefit from something you’ve given away, things get a little more complicated, and those complications come with tax consequences.
If your aim is to pass on your assets, such as your home, without them being dragged back into your estate later, you may be considering giving them away now, provided you survive seven years from the date of the gift. But before taking that step, it is important to understand the rules in place to prevent people from giving something away while still enjoying it.
So, what exactly is a gift with reservation of benefit?
Think of it this way: if you hand something over with one hand but keep holding onto the benefit with the other, it’s classed as a gift with reservation. That means the asset may still be treated as part of your estate for inheritance tax, even if it looks like you no longer own it.
On the other hand, if you give an asset away, walk away from all benefits, and live for seven more years, that asset will usually fall entirely outside your estate.
Some examples of Gifts with Reservation of Benefit
Gifting your home but continuing to live there
Imagine gifting your home to your child but continuing to live in it rent free. HMRC won’t see this as a true gift, and the property will still be treated as part of your estate, even after seven years, and taxed at 40% of its value. To avoid this outcome, you would need to pay full market rent. Additionally, establishing a formal tenancy agreement at market value ensures the arrangement is not classed as a gift with reservation of benefit.
Gifting a buy to let property while keeping the rental income
If you gift a rental property to your child but continue to receive rental income or any other benefit from it, HMRC will again say the gift never fully left your estate. The property will therefore remain part of your taxable estate on death.
How Freeman Johnson can help you
There are many smart, strategic ways to pass on assets without triggering the reservation of benefit rules. Whether you’re exploring ways to reduce inheritance tax, planning your estate, or simply want clarity before making a big decision, our team is here to guide you.
Let us help you navigate the rules and make confident choices about your family’s financial future.