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Inheritance Gifts with Reservation of Benefit

By: Mike Watson - Updated: 13 Aug 2010 | comments*Discuss
Gifts With Reservation Of Benefit Tax

Whilst it is possible to avoid paying Inheritance Tax on property or other items by giving them as gifts under the Seven Year Rule (whereby if you do not pass away within seven years the item will become exempt from Inheritance Tax) with a but of luck, not all gifts will be exempt from tax. It is important to be clear on this before you make a gift with the intention of retaining that full gifts value for the recipient.

Gifts with Reservation of Benefit

A gift with reservation of benefit is one where the person who donates the gift still retains (or reserves – i.e. the ‘reservation’) some benefit in relation to the gift.

For example, in perhaps the most common scenario you may give your house away but continue to live in it rent free. In this case the house will still be liable for taxation as part of your estate. However, if you were to start paying rent at a later date the terms of the Seven Year Rule would apply from that date. This means that with some shrewd guess work, and providing you are not hit by a bus you could take advantage of this rule – but the advantage would be minimal and not worth counting on!

In another scenario you may initially pay rent, but then stop paying. In this case the reservation period would start when you had ceased to pay rent and all possible tax exemptions under the Seven Year Rule would thus be lost.

In the case that a house is given away and the Seven Year Rule applies rough guidelines exist to ensure that the donor does not enjoy reservation of benefit. These guidelines are only approximate and ensure, for instance, that the donor does not stay in the house for more than two weeks in a year whilst the new owner is absent, or for more than a month whilst the new owner was there, and does not visit socially more than can usually be deemed reasonable. Of course, in the case tat a relative has donated the house to another relative these guidelines may seem difficult to follow to the letter, which is why they are flexible - each case being judged on its own merits.

Other gifts that may be subject to the Reservation of Benefit include cars that might be used to ferry the donor around ‘every day’. In this case, of course, from the point at which the donor stopped taking advantage of the car (and the new owners goodwill!) the Seven Year Rule would begin to be applied.

It is understood that when land is donated the donor may be interested in the welfare of that land and its uses for the rest of their life. They may also take infrequent walks on that land.

In short, one must be aware when giving away property that the Seven Year Rule may not be taken advantage of if one wishes to continue using that property. Clearly this is a rule to prevent people otherwise taking advantage of a tax avoiding loophole.

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