Can someone explain Gift with reservation?

Riom

Hi,

In order to minimise inheritance tax for folks who wish to leave their properties to their offspring, is setting up a Gift with reservation worth looking into?

Can someone explain how at it works, and the pros and cons?

Bluebirdman_of_Alcathays

Will IHT even be a factor? Is their estate worth more than £1m?

kingstreet

It's a gift you continue to derive benefit from, so for IHT purposes, it's useless as it doesn't leave your estate and is added back in for IHT calculation.

p00hsticks

My understanding;

If you give your property to someone else but continue to live in to rent free, then it's classed as a 'gift with reservation' (basically, not a true gift) and HMRC will still consider it to be part of your estate for Inheritance Tax (IHT) purposes when you die. Assuming the benficiary doesn't live in the property they will also potentially be liable for Capital Gains Tax (CGT) on any price rise between when it is gifted and when they eventually come to sell it.

So gifting a property in this way potentially increases the total amount of tax paid and is not usually a good idea.

For it to be classed as a true gift rather than a gift with reservation you would need to pay the new owner a market rent to remain living there. However you would not be liable for housing benefit for help with this rent, and if you need help with care or try to claim benefits in future the house value could still be taken into consideration under the 'deprivation of benefit' rules.

AnotherJoe

Riom wrote: »

Hi,

In order to minimise inheritance tax for folks who wish to leave their properties to their offspring, is setting up a Gift with reservation worth looking into?

Can someone explain how at it works, and the pros and cons?

Folks who wish to leave their properties to their offspring and who have large enough estates that IHT comes into play, and wish to avoid it, should ask a solicitor specialising in such things, to avoid a situation whereby they have amateurishly set something up that best case, doesn't work or worst case, causes more problems than it solves.

And a gift with reservations, as said, is precisely what you shouldnt look into, its the exact opposite of what is required. What is required is detailed planning and lots of understanding of their situation from someone who understands current law.

troubleinparadise

Your financial position would also need to be pretty comfortable - gifting a property but still needing to live in it would leave you vulnerable to losing the roof over your head should the recipient divorce, or become bankrupt, or just sell the property because they felt like it.

Take professional advice either legal or financial before embarking on any IHT planning moves.