The ideal in inheritance tax lifetime planning would be for the donor to gift the main residence out of the estate but at the same time remain living in the property. However, the ‘Gift With Reservation Of Benefit’ (GWRB) rules do not allow a simple transfer of a whole or even part of a property to another whilst the donor remains in residence (i.e. ‘reserves a benefit’). If such a transaction takes place the property is treated as remaining within the donor’s estate on death.
With specific reference to land the gift would be treated as a GWRB if there is some interest, right or arrangement allowing the donor to occupy and ‘enjoy the land concerned to a material degree’.
HMRC regard a ‘right’ as being caught by the legislation if the right entitles or enables the donor to occupy all or part of the land otherwise than for full consideration (i.e. unless full market rent is paid by the donor occupier to the donee owner).
No GWRB applies if the freehold is gifted and then the donor either takes a lease on the property at full rent or a lease at full rent had been carved out before making the gift.
Should a sale to a ‘connected person’ be at a price that is less than the full market value then the balance of value will be deemed to be a ‘gift’. There needs to be a sale at full market value; if not, then the ‘gifted’ value of the property will be included in the donor’s estate on death if he or she continues to reside in the property.
In 2008 James sold a house then worth £100,000 to his adult son, John, for £25,000.
John did not live in the house, but James remained until he died in 2016.
The disposal is a GWRB and the value of the property gifted was 75% of the total value.
Thus, 75% of the property’s value at death is treated as James’ property and the value will be liable to IHT.
This tip was first printed in Tax Insider in December 2016.