There are a number of strategies which you may consider utilising in the event of your wishing to enter into lifetime estate planning. You may wish to examine your estate as a whole with a view to mitigating any Inheritance Tax (IHT) payable following your death. One such strategy is gifting parts of your estate, whether that be property or cash, to others. You may be forgiven for thinking that this sounds simple enough, however, depending on the nature, size, and timing of the gift, you may just find that the gift makes its way back to your estate on your death for IHT purposes.
Everyone has an annual gifting allowance of £3,000 per year. If you make gifts in excess of £3,000, these are added back into your estate on your death if you do not survive for seven years from the date of the gift. The annual allowance is applied, and the excess amount of the gift is relevant for IHT purposes. Now, there are various rules and exemptions surrounding this (for example, gifts made between spouses and gifts made to charity are exempt from IHT) but this is the general rule. Depending on the amount of the gift, an estate which would otherwise be exempt from IHT might find itself straying into IHT territory.
This blog, however, will consider a slightly different type of gift – the “Gift with Reservation of Benefit” (GRB). By way of explanation a GRB is, on the face of it, a gift but, what distinguishes it from a standard gift, is that the donor (that is, the person making the gift) retains a benefit, or the use, of the asset gifted. As practitioners, the situation which most commonly arises for us is when a parent transfers title to their home into their child’s name but, crucially, continues to live in the property rent free. If the arrangement continues on that basis until the donor’s death, then the whole value of the donor’s interest in the property would be added back into their estate for IHT purposes.
Such arrangements should never be entered into lightly and certainly not without firstly having obtained professional advice on the matter. Careful consideration must be given to various aspects, such as the framing of an appropriate rental agreement between the parties involved, the rent payable (at market value and reviewed regularly) so that, if later questioned by HMRC, the arrangement may be viewed as genuine between the parties, and not a GRB with all its ensuing consequences.
GRB were the subject of a recent article published in The Telegraph, the link to which can be found here: HMRC claws back £700m in inheritance tax raid (telegraph.co.uk). The article highlights the pitfalls of these arrangements and how the families concerned were unaware of the GRB and the severely adverse consequences for them of being unaware of the rules.
The rules surrounding gifting and, in particular, GRB are complex. It is the duty of estate Executors to fully investigate the extent of a deceased person’s estate, and this extends beyond tangible assets owned by the deceased. The Executors must make enquiries to ascertain whether the deceased made any gifts during their lifetime and the nature of those gifts, and in the seven years prior to their passing. The estate Executors may also be interested to hear that from an administrative standpoint, even if an estate is not subject to IHT when including the value of the GRB, the GRB must be declared to HMRC by way of a full IHT return, and this may well have an adverse effect on timescales in terms of the overall progression of the estate administration.
If you require any advice on this or any other matter involving Estate Planning or Executry Administration, please contact the Blackadders Private Client and Executries Teams, working in Aberdeen, Dundee, Edinburgh, Glasgow and across Scotland.