Lifetime Giving – Avoiding the Tax Traps

With inheritance tax (IHT) thresholds frozen and reliefs becoming more restricted, many families are considering whether now is the right time to pass assets to the next generation. Lifetime giving can be effective, but the familiar “seven-year rule” is only part of the story. The Gifts with Reservation of Benefit (GROB) provisions can undermine planning where the donor continues to use or benefit from an asset after giving it away. If the GROB rules apply, the gift is ineffective for IHT purposes.

These rules apply to many asset types, but we most frequently encounter issues in relation to residential property and shares in family-owned companies.

Property Gifts

Most outright gifts of the family home, where the donor continues to occupy the property, fall within the GROB rules and fail from an IHT-planning perspective. However, there are limited situations where gifting of the family home can work:

• Payment of Full Market Rent: If the donor continues to live in the property but pays full market rent. Rent must be reviewed regularly, and the occupation documented through a tenancy agreement or licence.
• Co-ownership and occupation: A gift of a share of the home to someone who lives with the donor can fall outside the rules. Care is required, as the GROB rules apply if the donee later moves out.

Even where a GROB is avoided, gifting your home could present other issues – including with care funding assessments, loss of other significant tax reliefs, and creating risk on the donee’s death, divorce or bankruptcy.

However, gifting a holiday home can be effective, either by gifting a share of the property where it is used by multiple family members, or by the donor paying full market rent for use. This has become increasingly popular, but other tax considerations need to be factored in.

The GROB rules are broad and can apply even where the donor receives an indirect benefit linked to the gift. Pitfalls might include donees agreeing to take over all running costs in exchange for receiving a share of a property that they occupy with the donor, or gifting shares in a family company but receiving excessive remuneration or altered dividend patterns in return.

As a word of caution, even when a GROB is avoided, an annual income-tax charge under the obscure Pre-Owned Asset Tax (POAT) rules may instead arise. In particular, a cash gift which is then used by the donee to buy a property for the donor to live in would normally be caught by these rules.

Conclusions

Making gifts can be a complex business, particularly where the gift has some strings attached.

There are some instances where a gift of some or all of the family home can be made without triggering these anti-avoidance rules, but great care must be taken. Gifts involving holiday homes often offer more realistic opportunities.

Careful thought in advance and appropriate documentation will be required, and our team are, of course, happy to advise.

 

Meet the author: Victoria Taylor, Partner

 

This information does not represent legal or tax advice. Seek appropriate legal or tax advice about the topics covered, specific to individual circumstances, before taking or refraining from any action.