Gifts with Reservation of Benefit – The Gift Trap

Many families would have delved into tax planning following the changes to Agricultural Property Relief and Business Property Relief; however, many would have fallen into unforeseen tax traps when carried out without professional help.

Many believe that gifting property is enough to ensure the reduction of inheritance tax, however the transfer of legal ownership alone does not fully reduce the burden.

For example, an individual may seek to gift away their main residence, assuming that transferring the title is sufficient. At the date of gift, any capital gain arising is relieved by principal private residence relief, resulting in no capital gains tax being due. The gift of the property, being their main asset of value reduces their estate value to that below the nil rate band, therefore reducing their IHT to nil. But what happens where the transferor continues to live in the property?

If the transferor continues to live in the property, rent free, the beneficial title has not passed in the eyes of HMRC. The result, HMRC does not accept that the value of the property has passed out of the transferor’s estate, and in addition, the value of the property at the date of death, not the date of gift is included in the estate IHT calculation.

To ensure a successful gift of the asset, the transferor must pay a full market rent to the recipient of the property. Where this occurs, HMRC accepts that the beneficial title has passed to the recipient of the gift and out of the transferor’s estate.

Whilst this is one example of such a transaction, other such gifts can include gifting of business assets. It could be argued this is less impactful with the availability of APR and BPR, however if the taxpayer’s remaining business assets exceed the 100% APR/BPR allowance of £2.5m and the expectation is that the gifts are out of scope for IHT, it may come as a shock

If you need help with your tax planning or accountancy needs, see our services page on how we can help you.

Robert Black

Black Acre Rural Limited

rblack@black-acre.co.uk

07595 662661

www.black-acre.co.uk