A Gift with Reservation of Benefit: A Case Study
Let's look at the Inheritance Tax implications for Robert, who gives his house to his son but continues to live in it.Robert owns his home, which is worth £600,000. To try and reduce a future Inheritance Tax bill, he legally transfers ownership of the house to his son, David, but continues to live there by himself, rent-free.
The Situation
Robert lives in the house for another 10 years before he passes away. He assumes that because he gave the house away more than 7 years ago, it is outside of his estate for IHT purposes.
The 'Gift with Reservation' Rule
Because Robert continued to benefit from the house (by living in it) without paying his son a full market-rate rent, the gift is treated as a Gift with Reservation of Benefit.
The IHT Consequence
When Robert dies, HMRC will treat the house as if he had never given it away. The full market value of the house at the date of his death will be included in his estate for the purposes of calculating any Inheritance Tax due.
The gift was not effective for IHT because he did not give it away completely and without retaining a benefit.