Jun 2024
Are you aware of the pitfalls of the ‘7 year rule’ and Inheritance Tax? 
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Navigating the complexities of inheritance tax during estate planning can be quite the task. One critical aspect to understand is the concept of “gifts with reservation of benefit” (GROB), which can significantly influence your estate’s tax liability. At Carbon, we are committed to guiding you through this to ensure your estate planning is both effective and compliant. 

What is a Gift with Reservation of Benefit? 

A gift with reservation of benefit occurs when you transfer ownership of an asset but continue to enjoy benefits from it. For example, if parents transfer their home to their children but continue living there without paying market rent, they are considered to have reserved a benefit. As a result, for inheritance tax purposes, the property would still be part of their estate, irrespective of the transfer date. 

Understanding Potentially Exempt Transfers 

Potentially exempt transfers (PETs) are gifts made where no inheritance tax is due if the donor survives for seven years after making the gift.  

However, if any benefit from the asset is retained by the donor, this exemption is invalidated, and the asset remains part of the taxable estate. 

Defining Lifetime Gifts 

 Lifetime gifts encompass a wide range of assets including: 

  • Money (cash or bank transfers) 
  • Personal property (such as furniture, jewellery, or antiques) 
  • Real estate 
  • Stocks and shares 
  • Unlisted shares held for less than two years 

 Additionally, selling assets below market value constitutes a gift for the difference in value. 

Tax Responsibilities on Gifts 

 In cases involving gifts with reservation, it is typically up to the recipient to handle any related tax liability. Executors also have an obligation to settle any outstanding taxes within 12 months after the death of the estate owner. This dual responsibility ensures that all HMRC regulations are met diligently. 

Compliance and Avoidance Strategies 

 HMRC rigorously scrutinises gifts with reservation as part of its measures against tax evasion. To avoid complications: 

  • Ensure no benefits are retained from gifted assets. 
  • Consider structured transactions carefully — for example, paying market rent for properties gifted to children might mitigate potential issues with HMRC but could introduce additional tax implications. 

Your Partner in Estate Planning 

Working alongside qualified tax specialists where required, at Carbon, our Wills & Probate Team provide tailored advice suited to your unique situation. Whether you need guidance on lifetime gifts or managing gifts with reservation benefits effectively, f we figure as part of a wider team to our ensure that your estate plan optimises tax advantages while fulfilling legal requirements. 

For personalised support in safeguarding your legacy and securing peace of mind for you and your loved ones, don’t hesitate to contact us via mail@carbonlawpartners.com 

The contents of this article does not constitute legal advice and should not be relied upon. Always consult a legal professional before taking any action.