Gifts with Reservation of Benefit (GROB) – Inheritance Tax (IHT)
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Lifetime gifts with a ‘reserved benefit’ may end up being charged to IHT on your death.
Inheritance Tax (IHT) is payable on the net estate of someone who has died. It is subject to various exemptions and reliefs. However, it does not only include those assets that comprise the estate at date of death. Gifts which purported to be made during the deceased’s lifetime may be added to the gross estate.
Lifetime Gifts
Some such lifetime gifts may become free of IHT if they’re made more than 7 years prior to the date of death. And, those made 3 years or more before death may also qualify for what is known as ‘taper relief’ – a siding scale of reduced IHT payable the longer you survive. These lifetime gifts are called a PET – a potentially exempt transfer.
| TAPER RELIEF | |
| Years before death | Rate of IHT |
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 + years | 0% |
To qualify as a PET, the gift must be outright, and the donor (the person making the gift) must not continue to enjoy the asset. This (continuing to enjoy an asset) is seen by HMRC as a ‘gift with reservation of benefit’. They are sometimes referred to as a GROB.
Are GROBs chargeable to IHT?
Yes! The value of a GROB will fall back into your estate for IHT purposes. No taper relief will apply (as it would with a PET), and the gift will be counted even if it was made more than 7 years before death (remembering that a PET falls away altogether after 7 years).
What does reserving a benefit mean?
What reserving a benefit looks like depends on the asset(s) in question. So for example, if you have a collection of classic cars, and you purport to gift one to someone, then retaining a benefit would probably be something like continuing to store the car with your other’s, and continuing to drive it and enjoy looking at it as you always have! For it to be a PET, you would need to be seen to physically give it away, and break ties with it. Even changing the V5 to the supposed new owners name if the reality was it remained in your control and being enjoyed by you as it did previously.
A GROB is where you purport to make a gift, but you keep control/enjoyment of the asset.
Holiday homes will often attract debate around this topic. Say an ageing couple want to take IHT planning measures, and so decide gift their holiday cottage to their children. Let’s say they have owned the property for many years, and indeed they and the whole family have used it for their enjoyment. Even if the title is updated to purportedly show the children as the new owners, for IHT purposes, if no ostensible change happens in usage terms, the Revenue may well seek to argue that some or all of the value of the holiday home remains in the estates of the mother and father.
Can I retain a benefit but still avoid a gift becoming a GROB?
Yes, there are circumstances in which you can retain a benefit, AND have the asset excluded from your estate for IHT purposes. If you achieve this, the PET rules apply and so taper relief may also be available. One way to achieve this is to start to pay a ‘market rent’ for the asset you gifted.
To return to the holiday home example above, if on transferring the cottage to the children the parents also started to pay a proper commercial rent, then they could continue to use the property themselves, without fear of it being treated as a GROB. This might also have the added benefit (for IHT mitigation) of reducing the accumulation of income due to the new outgoing.
It is relatively easy process to establish market rents for property. Other assets may be a little more difficult to achieve this with. So, the classic car example above might be a little more tricky to establish a commercial value for ‘rent’.
The best way to avoid lifetime gifts becoming a GROB (and therefore chargeable to IHT) is to simply make sure you do not retain a benefit, thereby it becoming a potentially exempt transfer, and it will fall out of your estate altogether (subject to the ‘7 year PET rule).
Expert Estate Planning Solicitors
We hope you have found this and our many other articles helpful. Please remember that it is not intended to be legal advice specific to your particular circumstances, and it (and any comments posted) should be taken as such. Our expert estate planning/probate solicitors are here to help if would like one to one advice – so please reach out by email, contact form, or phone.
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