Gifting property is where the ownership of the property is transferred without compensation. However, when gifting a property, there are many rules when it comes to taxes making the matter more complex. In particular, the concept of “gifts with reservation” has significant implications for both the donor and the recipient. Understanding these implications is crucial to ensure compliance with tax regulations and to make informed decisions regarding property gifting. In this blog, we will explore the tax implications of “gifts with reservation”.

“Gifts with reservation” refers to situations where an individual transfers ownership of a property to someone else but retains the benefit or use of that property. The most common example is when someone gifts a property, such as a house, to a family member but continues to reside in it rent-free. In such cases, HMRC may view the gift as not truly complete due to the reservation of benefit, leading to potential tax consequences.

For UK residents, gifts with reservation fall under the scope of Inheritance Tax. According to IHT rules, if the donor continues to enjoy benefits from the gifted property, it may still be considered part of their estate for tax purposes. Therefore, upon the donor’s death, the value of the property may be subject to IHT at 40%, potentially reducing the overall inheritance received by the recipient.

There are certain exceptions and planning opportunities available to mitigate the impact of “gifts with reservation.” One such option is the “seven-year rule.” If the donor survives for at least seven years after making the gift, it becomes exempt from IHT. However, should the donor pass away within this period, a sliding scale of tax rates may apply, reducing the amount of relief available.

Another strategy to consider is the creation of a “life interest trust.” By establishing such a trust, the donor can transfer the property while still retaining the right to live in it for a specified period. This arrangement can help minimise IHT implications and provide greater control over the property’s future.

While gifting property can be a meaningful gesture, it is essential to understand the tax implications associated with the gifting of a property. Being aware of the potential impact of retaining benefits from the gifted property is crucial to avoid unintended tax liabilities.

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