Gift with Reservation of Benefit

carly_8889

Hello all! I would be grateful for some unofficial advice if anybody has a better understanding of this. My mum's partner has asked me because I did all the probate for my grandfather's estate but this isn't something I have come across before and I am wary of it.

So, mum's partner and his brother had POA over their mum's affairs. ETA: Their mother passed away last month. When their father died last year he left everything their mother except for some small legacies to the grandchildren. His estate included £50k worth of Premium Bonds which they withdrew in August last year (PB can be kept for 1 year after a persons death). They didn’t know what to do with the money (a nice problem to have) and eventually decided to re-invest them back into Premium Bonds because their Mum liked getting the cheques in the post. However, she already had the maximum £50k’s worth in her own name so, in September, mum's partner and his brother each bought £25k with the money that had been reimbursed directly to their mother from the Premium Bonds. It was always clear and understood that this was still their Mum’s money if she needed it, and each month they gave to her any winnings that ‘their’ bonds had won. 

Mum's partner contacted me to ask how to declare this on the probate/tax forms? He said that  it is not a moral issue about tax because whichever way you play it their Mum’s estate is still well under the threshold for inheritance tax. But he wanted to know if he should declare it as a ‘gift’ (which requires a different form), or if he should just include the additional £50k in her estate total and provide a covering note to explain? His brother takes the view that it’s not worth including/mentioning this £50k on the forms at all, but mum's partner's inclination is to be upfront and open about it.

Now, as lovely as that intention was, my understanding is that this would still be subject to the 40% IHT charge and would be treated as a gift because the money was put into their names and the 7 year rule does not apply. I informed him of this, however he has since gone away and read the guidance notes for Form IHT400 and on page 21 under “Gifts with reservation of benefit” it says that where the donor (i.e. the deceased) derives benefit (the interest) from the gift then “the law says that we can include the assets as part of the deceased’s estate at death.”   And because they gave her any winnings, he thinks that this applies.

I'm really unsure of this. In those simplistic terms then surely you could just take all their money, put it into an account in your name, give them the paltry 0.01% interest that it would earn and then less than a year later if they pass away, claim that all their funds are exempt from IHT and amounted to a tax free gift? Am I being super dim?! Regardless, I know that his brother's suggestion of ignoring the entire amount is definitely NOT the way to go.

Would be so grateful for anyone's advice/experience/thoughts. I've recommended he should seek professional advice regardless but I doubt he will.

Jeremy535897

I think you may be over thinking this. I take it that their mother has died? I am not a lawyer, but it seems clear from what you have said that the brothers did not use their POA to make gifts to themselves. Instead they held the premium bonds as bare trustees for their mother (it should have been done with a proper legal document, and it is a way round the £50,000 cap). Accordingly the premium bonds are in her estate for probate and inheritance tax purposes. If she divided her estate between them, and there are no debts that need satisfying out of the premium bonds, they will presumably just keep the premium bonds that are already in their own names.

You say the mother's estate is well within the inheritance tax nil rate band, so I don't know why you are concerned about inheritance tax? Gifts within 7 years of death just reduce the nil rate band on death (which is why your simplistic idea doesn't work).

Even if there was a gift (and from what you say I don't think there was), the GWR rules or POAT rules would not apply. She didn't reserve an interest in the prizes. They voluntarily returned them.

[Deleted User]

’Now, as lovely as that intention was, my understanding is that this would still be subject to the 40% IHT charge and would be treated as a gift because the money was put into their names and the 7 year rule does not apply. I informed him of this, however he has since gone away and read the guidance notes for Form IHT400 and on page 21 under “Gifts with reservation of benefit” it says that where the donor (i.e. the deceased) derives benefit (the interest) from the gift then “the law says that we can include the assets as part of the deceased’s estate at death.”   And because they gave her any winnings, he thinks that this applies.’

As Jeremy says, I have no idea why you believe that there is a 40% IHT charge if the estate is under £325000 value. You are correct when you say that the gifts, whether or not they are treated as such or not, form part of the estate. But, unless they increase the estate value to beyond £325000, there is no IHT to pay on anything. Inheritance tax is not my speciality but this seems clear to me.

carly_8889

My concern was that as the premium bonds had been put into their names and not retained under their mother's name that this would be viewed as a very recent gift and therefore be subject to the 40% tax. But if that is not the case then excellent news! Thank you. I was so busy trying to explain it properly that I can't believe i forgot to mention that his mother had passed away. Unbelievable.

Jeremy535897

carly_8889 said:

My concern was that as the premium bonds had been put into their names and not retained under their mother's name that this would be viewed as a very recent gift and therefore be subject to the 40% tax. But if that is not the case then excellent news! Thank you. I was so busy trying to explain it properly that I can't believe i forgot to mention that his mother had passed away. Unbelievable.

Straightforward lifetime gifts of assets to individuals could only be subject to IHT if the gifts were within 7 years of death and exceeded £325,000 in value. As I pointed out, gifts totalling £50,000 (unless there were others of more than £275,000) within 7 years of death are not subject to IHT (and I am ignoring exemptions like the annual exemption for simplicity), but reduce the nil rate band available to the estate.