Parents who pass down a large asset such as a property to younger relatives, are being warned that even if they survive past the crucial seven-year inheritance tax (IHT) exemption period, their family may still face a hefty tax bill.
HMRC‘s IHT rules mean that if someone gifts large amounts of money or property up to seven years before dying it is no longer taxable, however there are circumstances where it may still be subject to IHT for another seven years.
Changes to IHT announced in last year’s budget by Chancellor Rachel Reeves means parents across the country have been racing pass on the family home to their children in a bid to avoid big inheritance tax bills. The number of properties exchanging hands increased by more than 45% to around 220,000 in 2024, according to the Land Registry.
However, experts have urged caution over the trend as homes can still be subject to inheritance tax.
UK Property Accountants have said anyone who wished to make a lifetime gift to their loved ones in order to save them from Inheritance Tax (IHT) at a later stage needed to be aware of HMRC‘s ‘gifts with reservation of benefit’ rules.
These refer to a situation where a person has given away property but still retains some right or benefit over it. For example, someone might give away their house to their children and still live there.
UK Property Accountants explains that gifts with reservation of benefit rules are an anti-avoidance measure to prevent a donor from giving away an asset but continuing to derive some benefit from that asset after the gift had taken place.
A gift must be a full transfer of ownership, and the person who made the gift must give up all control or benefit over the property, for it to be considered a potentially exempt transfer (PET), meaning it is not subject to inheritance tax seven years after the gift was made.
If there is any reservation of benefit, the gift will not be considered a PET and may still be subject to inheritance tax.
Case study one: A father gives a son a property £500,000 but continues to live in it. The effect of the Gift with Reservation of Benefit (GWROB) rules is to treat the house as still being in the death estate of the donor. Therefore, the market value of the house at the date of death will be charged to inheritance tax.
If a relative passes a property onto a relative and continues to live in it, but pays them a market rental rate then they will not be considered to have financially benefited from the gift and the relative will not have to pay inheritance tax on the property.
