A Gift with Reservation | What is it?
Many of us will make gifts in our lifetime and presume that the value of the gift is then not part of our estate when we pass away. This isn’t always true however due to the ‘reservation of benefit’ rules.
Essentially, a gift with reservation is when an individual gives an asset to someone else while they are still alive but still benefits from it in some way. A prime example of this would be someone giving their home away to other family members yet still benefiting from it by living in the property.
As we grow older many people want to transfer their home to their children, either to make it simpler when they do pass away or to ensure their children’s future security. They may also feel that this is a valid way of reducing their own inheritance tax liability however this isn’t effective. Where there is a reservation of benefit the estate of the person giving the gift will be taxed as if they still owned the asset at the date of their death.
If someone wishes to make a ‘gift’ of their property but retain some security they are often advised to put the property into a trust as this can avoid the problems that sometimes occur as a result of gifting a property to family members. In its simplest form, a trust is a legal arrangement where an asset, such as a property is passed to someone for them to look after in order for others to benefit. A property could be put into a trust, with the trustees taking care of it so that the children can benefit in the future when the parents making the gift have passed away. While this does alleviate some issues it would not prevent the property from being regarded as a gift with reservation.
But what about the 7-year rule?
Many individuals will have an understanding of gifts and that they can give gifts during their lifetime without any immediate tax consequence. If there is no reservation of benefit, so the gift is genuine and the person making the gift no longer benefits, the value of that gift is removed from the estate after seven years.
Gifts like this can be used to reduce a person’s taxable estate but they must live for seven years after the date of the gift.