People gifting property need to be careful not to fall into IHT trap

Taxpayers paid £125m in unnecessary tax through ‘gifts gone wrong’ in the past year* says Boodle Hatfield, the leading private wealth law firm.

Boodle Hatfield says that the most common example of this is parents gifting the family home to their children but continuing to live there. This makes them so-called ‘Gifts with Reservation of Benefit’ – assets which have been gifted to another person but are still being used by the original owner.

These assets are considered by the taxman to remain part of the donor’s estate for Inheritance Tax (IHT) purposes. As a consequence, those who have been gifted the assets could face a considerable tax bill.

440 people made the mistake of falling into the Gifts with Reservation of Benefit trap in the last year alone.

Boodle Hatfield says given recent increases in property values, HMRC is likely to be examining IHT returns closely to ensure the right amount of tax has been paid and that gifts of property, that have been made to mitigate IHT, have been executed properly.

Boodle Hatfield says there are a number of ways in which home owners can reduce the IHT bill on their estates without falling into the Gifts with Reservation of Benefit trap. These include:

• Paying a market rent – giving the property to family members but paying a full market rent for their continued use of the property
• Downsizing – selling the property, buying a smaller one and gifting the net proceeds to one’s children
• Cohabitation – giving a share of the property to family members and living in the property together
• Equity release – making use of a lifetime mortgage or equity release can enable owners to gift cash to their children. However, this should be approached with caution, as fees and interest payments will further reduce the inheritance that beneficiaries could otherwise receive

Boodle Hatfield says people who are planning to pass on assets need to take the ‘seven-year rule’ into consideration. Assets may be gifted without incurring IHT provided the donor survives for at least seven years after making the gift.

Geoffrey Todd, Partner at Boodle Hatfield says: “Hundreds of people are being unnecessarily caught out each year when passing assets along to the next generation. On average, they are throwing away more than a quarter of a million pounds each by falling into an avoidable trap.”

“The complexity of the Inheritance Tax regime means it’s very easy to make mistakes. Unfortunately, this can lead to beneficiaries facing hefty bills, so it’s crucial to seek professional advice before including the family home in one’s estate planning.”

*HMRC, year-end March 30^th 2019, most recent year for which data is available

Comments from this article were first published in The Daily Express on Monday 15th November 2021.