By Laura Sparrow, Assistant Solicitor. Contact Thomson Snell and Passmore 01892 510000.
A grandmother who wants to give a property as a gift to her children needs to be wary of using the property after the transfer because it may still become subject to IHT.
Elizabeth intends to give a property as a gift to her grandson and wife, who is expecting their first child. The property is part of an inherited estate, which has been passed down in the family for generations.
The exact mechanics of any transfer of the property are unclear at this stage. But supposing the property was transferred into the couple’s name and Elizabeth still wanted to make use of the property, what would the inheritance tax (IHT) implications be?
The danger with such a transfer would be that it might be deemed a gift with reservation of benefit (Grob). The gift could be caught by section 102 of the Finance Act 1986, which as the effect of subjecting such gifts to IHT as if they remained part of the estate.
To ensure that such a lifetime gift is fully effective for inheritance tax purposes, Elizabeth would have to give the property to the couple without retaining any significant benefit or enjoyment from the property. Indeed, the property would have to be enjoyed by her grandson and granddaughter-in-law to the virtual exclusion of Elizabeth. If Elizabeth were to decide to spend any substantial length of time staying at the property she would have to consider paying the couple the appropriate market rent.
Allowances and exceptions
There are however, allowances made for a minor reservation of benefit. A number of examples are outlined by HMRC. Elizabeth would, for instance, be able to visit the house for domestic reasons, for example, to baby-sit for the couple once their child has been born.
Elizabeth could stay at the property for no more than two weeks a year in the absence of the couple, or alternatively she could stay with them for less than one month each year.
She can also make social visits as a guest of the couple (excluding overnight stays). However, the number of these visits which Elizabeth would make should be no greater than the visits, which she might have been expected to make had there been no gift.
Elizabeth would also be permitted to stay with the couple for some short-term purpose, for example, while her granddaughter-in-law convalesced after medical treatment, or while she looked after either of them in a similar situation. Elizabeth could also stay in the house whilst, for example, her house was undergoing repair or refurbishment.
Another plausible example of breach of Grob rules would be if Elizabeth walked her dogs or rode her horses over land which had been transferred over. However, this would be deemed to be outside the GROB provisions so long as it did not restrict the couple’s own use of the land.
Giving a share
However Elizabeth could also choose to dispose of a share of the property only. Then, if the couple and Elizabeth both occupied the property and shared the outgoings, no reservation of benefit would arise.
There is also a danger Elizabeth could be caught by the pre-owned asset provisions if she did not take the above considerations into account. This would involve the imposition of an annual income tax charge on Elizabeth in relation to any benefit she received from the property, unless she elected for the gift to be taxed in accordance with the GROB provisions.