Mark McLaughlin highlights possible limits to important inheritance tax exceptions from a ‘gifts with reservation’ charge where a former residence is gifted by an individual and later reoccupied by them.
Most lifetime gifts of a residential property (e.g., from a parent to adult offspring, where the parent is going into a nursing home) are straightforward ‘potentially exempt transfers’ (PETs) for inheritance tax (IHT) purposes, which become exempt gifts if the parent (in this example) survives at least seven years thereafter.
Trapped in the IHT net?
However, what if the parent returned to live in the gifted property within seven years? Anti-avoidance rules (‘gifts with reservation’ (GWR)) are broadly designed to prevent ‘cake and eat it’ situations whereby individuals seek to reduce exposure to IHT on their estates by making lifetime gifts of assets (which they hope to survive by at least seven years) whilst continuing to have the use or enjoyment of those assets. If the donor is ‘caught’ by the GWR rules, the gifted (or possibly substitute) property is treated as remaining part of their estate for IHT purposes.
In the above example, does this mean that the parent cannot later reoccupy the property, or occasionally stay with their offspring in the property, after giving it away? As with most tax questions, the answer is: ‘It depends’.
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HM Revenue and Customs guidance (Revenue Interpretation 55) indicates that a property donor will not be ‘unreasonably prevented from having limited access to property they have given away’. This includes circumstances where a house becomes the donee’s residence but where the donor subsequently stays with the donee for less than one month each year, or in the donor’s absence for not more than two weeks each year. Temporary stays for a short-term purpose may also be allowed (e.g., while the donor looks after the donee convalescing after medical treatment).
Another GWR let-out potentially applies where the donor continues living in the property after it has been given away, but they pay the donee a market rent for their continued occupation. The donor’s occupation or use of the land is disregarded for GWR purposes if full consideration is paid for it in money or money’s worth. However, the donee will generally be liable to income tax on the rent received.
A further possible escape from an IHT charge on death under the GWR rules applies if the following conditions are all satisfied:
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The occupation results from an unforeseen change in the donor’s circumstances.
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The donor is unable to maintain themself through old age, infirmity or otherwise.
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The occupation represents reasonable provision by the donee for the donor’s care and maintenance.
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The donee is a relative of the donor or the donor’s spouse (or civil partner).
However, in each case, care is needed to ensure that the donor’s stays in their former residence do not escalate beyond permissible levels into more significant ones (e.g., where the donor increases their overnight visits to stay with the donee at the residence from one month to three months a year). Such longer stays may be caught by the GWR rules.
Practical tip
Consider the potential implications of gifting the family home for taxes other than IHT (e.g., capital gains tax), as well as non-tax legal implications (e.g., security of tenure), in advance of making any such gifts.
