Alex and I have previously done a few blogs on this topic but, considering how often people fall foul of this, it seems that it may be worth some more space on the Allan Janes page.
So let's start with the basics: what is a gift? Well, according to the Cambridge English Dictionary, a gift is “a present or something that is given”. In practical terms, it requires the donor (person making the gift) to part with an asset (whether this is an item or cash or a right to something) and to give the benefit of that thing to someone else. Once gifted, the value of the asset leaves the donor's estate for inheritance tax purposes if they survive the gift by seven years. If they die within seven years of the gift then it will use all or a part of their estates inheritance tax allowance.
For this reason, gifting can be an excellent form of inheritance tax planning for individuals who have more assets than they need to maintain their lifestyle.
Gifts can be made to a person outright or into trust. In most cases the 7 year survivorship rule will still apply.*
So the next question must be: when is a gift not a gift? This tends to happen when the donor hasn't really parted with the item. They still retain a benefit in it. This is most often seen when people gift away their home or a holiday home but continue to live in it or use it for holidays as normal. HMRC view this as a gift with a reservation of benefit (GROB for short) and the gifted asset is still deemed to be in the donor's estate for inheritance tax purposes.
The real sting to this is that, for all other taxes, the asset has passed to the beneficiary and so, particularly when someone tries to gift their home away, beneficiaries can find themselves with a capital gains tax bill when the property is sold as the property was no longer the principal private residence of the legal owner.
Occasionally someone will choose to transfer their home to a beneficiary while knowing that it will not qualify as a gift for inheritance tax purposes. Most often this is to try and protect the property from care costs. This rarely works either as the transfer is treated as a deliberate deprivation of assets by the Local Authority and so it is treated as still belonging to the donor. To add insult to injury the capital gains tax implications above still apply for the beneficiary.
There were several companies who sell the above as a way of avoiding care fees but with gifts of the property to a trust, rather than to an individual. Alex has written an excellent blog on these (Asset Protection Trusts) but it's safe to say they do not work and often cause more problems for the donor and the beneficiaries.
So, with all that in mind, I would advise anyone looking to make gifts as a way of mitigating inheritance tax during their lifetime to take professional advice. It could ultimately save you and your beneficiaries a significant amount of time, expense and headache. Alternatively if you have made gifts and are now worried that they may be gifts with a reservation then please do contact us to discuss your options.
If you would like help on any of the issues discussed above then please contact Ashley Minott on email@example.com or on 01494 893518.
*there are exceptions where business assets or gifts are being made out of surplus income which do not have the same survivorship criteria. A further blog to come on these.