The gift with reservation of benefit (‘GWROB’) rules only apply for IHT, the gifted asset legally transfers to the donee.
In our recent article that set out the basics of inheritance tax, we mentioned that gifts which are neither immediately chargeable nor exempt would be a considered potentially exempt transfer (‘PET’), falling outside of the donor’s estate should they survive seven years from the date of the gift. However, if the donor dies within that seven-year period, the PET will ‘fail’ and become chargeable at the applicable rate (currently 40%), subject to the availability of any relevant exemptions and/or reliefs as well as a tapering of the rate if the gift was made more than three years before death.
At the introduction of the legislation, this led to a number of individuals legally transferring ownership of an asset whilst continuing to make use of that asset. Only two years after the enactment of the Inheritance Tax Act 1984, the government introduced anti-avoidance legislation to counteract this known as the Gift with Reservation of Benefit (“GWROB”) rules.
The effect of the legislation is to treat the asset as continuing to form part of the donor’s estate until their death or such time as they ‘release the reservation’ i.e. cease to derive a benefit. Where the donor releases the reservation, this will be treated as a deemed PET.
Where the asset still forms part of the donor’s estate at death, this can lead to a double-charge to IHT: on the original PET and on the death estate. Relief is available although HMRC will used the computation which gives the highest tax charge.
The GWROB rules will not apply where the donor:
- Pays full market rent for the use of the asset (an income tax charge arises on the donee); or
- Is virtually excluded from benefiting from the asset or the benefit is insignificant in relation to the gifted asset.
HMRC guidance includes the following examples of where a donor is virtually excluded or where the benefit is insignificant:
- A house which becomes the donee’s residence but where the donor subsequently stays, in the absence of the donee, for not more than two weeks each year, or stays with the donee for less than one month each year;
- A valuable painting which is enjoyed by the donor on short visits to the donee’s house.
- A temporary stay for some short-term purpose in a house the donor had previously given away, i.e. while the donor or donee convalesces after medical treatment, or whilst the donor’s own home is being redecorated.
- Visits to a house for domestic reasons, for example baby-sitting by the donor for the donee’s children;
- A car which the donee uses to give occasional (less than three times a month) lifts to the donor;
It should be noted that the inclusion of the asset within the donor’s estate for IHT is for that purpose only as created by the GWROB rules. The rules do not affect the legal transfer of the asset which moves from the donor’s estate to the donee’s on the date of the initial gift. For capital gains tax purposes, the date of disposal of the asset will therefore remain the date of the original gift and the donee will not benefit from any capital gains tax uplift on the death of the donor.
After the introduction of the GWROB rules some individuals came up with the bright idea of selling assets and gifting the cash to the donee who would then acquire a similar asset of which the donor could make use. Taking HMRC a few years to catch on to this, the government introduced the Pre-owned Asset Tax legislation with effect from April 2005.
The rules impose an income tax charge on individual based on:
- The benefit they enjoy from the occupation of land or the possession or use of chattels which they once owned, or which they assisted other persons to acquire, and
- Their deemed power to enjoy intangible property in certain settlor interested settlements.
Should you or a family member wish to discuss the tax implications of making a gift or wider estate planning options, please do not hesitate to get in touch