Gifts with Reservation of Benefit

Gifts with Reservation of Benefit

Inheritance tax is something that individuals navigating the complexities of estate planning need to have at the forefront of their mind. Among the various rules associated with inheritance tax, the concept of “gifts with reservation of benefit” is something that people are not often aware of; and fail to consider in their plans.

Gifts with reservation of benefit (“GROB”) rules come into play when an individual makes a gift but continues to benefit from it in some way.

Imagine a scenario where a parent gifts their property to their child but continues to reside in it without paying rent. Although legal ownership has transferred to the child, the parent’s continued use of the property raises questions about the genuine nature of the gift. The issue here is that the parent has not truly relinquished control and is still benefiting from the asset.

To address such situations, inheritance tax laws include provisions to prevent individuals from avoiding tax by making gifts while retaining some form of benefit. If the gift falls under the category of a GROB, it will still be considered part of the donor’s estate for inheritance tax purposes.

What are the rules of Gifts with Reservation of Benefit?

Navigating the rules relating to GROBs can be complex and requires careful consideration of the circumstances surrounding the gift.

The key concept to consider is the “reservation of benefit.” This refers to any situation where the donor continues to benefit from the gifted asset in some way. This benefit could take various forms, such as continued use of property, receiving income generated by the asset, or retaining control over how the asset is managed.

It’s essential to assess the arrangement thoroughly to determine whether a reservation of benefit exists. If it does, the gift may be subject to inheritance tax, even if legal ownership has been transferred to the recipient.

To illustrate the implications of GROB rules further, let’s consider a practical example:

Suppose an individual gifts a valuable piece of artwork to their sibling but continues to display it in their home and derive enjoyment from it. Despite legally no longer owning the artwork, the individual’s continued benefit from its presence constitutes a reservation of benefit. As a result, the gift may still be subject to inheritance tax upon the donor’s death.

Navigating the complexities of GROB rules requires careful planning and consideration of the implications of any gifts made. Individuals should seek professional advice to ensure compliance with inheritance tax laws and avoid unintended consequences.

Understanding the concept of gifts with reservation of benefit is crucial for effective estate planning and inheritance tax management. By being aware of the implications of GROB rules, individuals can make informed decisions when making gifts and avoid potential pitfalls in the tax system. Seeking expert advice is advisable to navigate these complexities and ensure compliance with relevant legislation. Ultimately, careful planning and consideration can help mitigate tax liabilities and preserve wealth for future generations.

Contact us

If you’re concerned about inheritance tax or want to update your Will, contact Bruce Clarke, Head of our Private Client team, on t. 01732 440 853 or e. BruceClarke@rixandkay.co.uk