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Can someone explain Gift with reservation?

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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?

Comments

  • Will IHT even be a factor? Is their estate worth more than £1m?
  • kingstreet
    kingstreet Posts: 39,253 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    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.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
  • p00hsticks
    p00hsticks Posts: 14,400 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    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
    AnotherJoe Posts: 19,622 Forumite
    10,000 Posts Fifth Anniversary Name Dropper Photogenic
    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.
  • 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.
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