Should an individual attempt to gift assets to reduce their inheritance tax (IHT) liability, they additionally need to ensure that they do not keep any type of benefit in those assets. Should they retain a benefit, it will be considered as part of their estate when calculating IHT. These are known as a Gift with Reservation of Benefit (a GROB).
The most common example would be an individual giving their home away during lifetime but continuing to live in it afterwards. As they have retained the benefit of living in the property it will be considered as part of their estate for IHT purposes.
Assets are treated as GROBs if an individual disposes of assets by gift, after or on 17 March 1986 and either:
- possession and enjoyment of the property is not genuinely assumed by the receiver at or before the beginning of the relevant period; or
- at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the giver and of any benefit to them by contract or otherwise;
The relevant period in the above is either 7 years before the giver’s death or the period between the gift and death (if the gift was made within 7 years of death).
Consequence of a GROB
Should a GROB cease during lifetime, it will be seen as a Potentially Exempt Transfer (PET) from the date that the individual ceased retaining a benefit. If the individual resumed benefiting at a later date however, it would become a GROB again.
Should a GROB continue until death, for IHT purposes it will be treated as if the giver retained their interest in the assets and it will be taxed as part of their estate for IHT purposes. For other purposes however it is not treated as part of the estate, for example Capital Gains Tax (CGT) uplift on death is not available. The recipient of a GROB is personally liable to pay IHT on a GROB, however most Wills are written so that the executors will pay any tax due from lifetime gifts.
A GROB of the family home may actually make the situation worse for them if the home is sold between the gift and death as the principal residence exemption for CGT may be lost.
The exact calculation for the IHT due on a GROB can be complex. In short, it involves two calculations. One ascertaining the tax due on the basis that an asset had never been gifted and it forms part of the estate, and another that involves considering that asset was gifted. The calculation that produces the higher sum of tax payable for HMRC is used.
There are a number of exceptions to the GROB rules.
1. IHT exempt gift
A gift will not be a GROB if the gift is an exempt transfer, for example if it is a gift to a charity or spouse. This does not apply however to the £3000 annual exemption or regular payments out of income.
Whilst ordinary transfers between spouses and civil partners are not seen as GROBs due to the spousal exemption, a transfer to an Interest in Possession trust in a spouse’s favour will be seen as a GROB.
2. Full Consideration is Given
If an individual gives away an interest in land or a chattel but retains benefit in it, it will not be considered as part of the giver’s taxable estate if full consideration in money or money’s worth is also given.
Using the home example, if a person gives away their property, but pays full market rent to the receiver of the gift, it will not be seen as a GROB as the giver is providing full consideration.
3. Change in Circumstances
If an individual gives away their interest in land and ceases to occupy the land, a future resumption of occupation will not trigger the GROB rules if the following conditions are satisfied.
- The occupation is a result of a change in the giver’s circumstances since the date of the gift.
- The change of circumstances was unforeseen at the time of the gift and were not brought about by the giver to receive the benefit of these provisions.
- The giver became unable to maintain themselves due to old age, infirmity or other reasons.
- Occupation of the land represents reasonable provision by the receiver for the care and maintenance of the giver.
- The receiver is a relative of the giver, or the giver’s spouse or civil partner.
These provisions are intended to not punish givers who have become unable to maintain themselves since making the gift and have to fall back on the assistance of their family and it should be noted that it is not a position that can be taken intentionally by the giver.
If an individual inherits from an estate but completes a deed of variation to direct those assets elsewhere and then retains a benefit in those assets, it will not be seen as a GROB as for IHT purposes the individual never inherited.
Similarly, if the individual disclaimed and retained a benefit in those disclaimed assets, no GROB will occur.