Gift with reservation of benefit
If you give something away but reserve the right to use it, it counts as a gift with reservation – and is treated as remaining your property. The gift would not be recognised for inheritance tax purposes and its value would be added to your estate when you died. This applies to any such gifts made on or after 18 March 1986.
For example, if you give your home to a child on condition that you can go on living in it until your death, this would count as a gift with reservation of benefit. This could apply even if there was no formal agreement that you go on living in the home.
Accountants, insurance companies and others have been fairly successful in devising schemes – often using trusts and generally complicated – that let you continue to enjoy the income or use of an asset that you have given away without falling foul of the gift with reservation rules. The Revenue has now pulled the plug on most of these schemes by introducing the pre-owned assets tax.
If you try to get round the inheritance tax rules by making a series of gifts, the Revenue is allowed to treat them as associated operations which form a single direct gift. For example, you might think you could give an extra £2,500 to an adult child by making ten tax-free gifts of £250 to friends which they pass on. The taxman will treat this as a single £2,500 gift, however – and potentially subject to tax.
In working out the value of a bequest or gift, the Revenue may treat as yours property which it reckons is related to yours – in particular, anything owned by your husband, wife or civil partner. This means you can’t reduce its value by splitting it with your spouse or partner.
Suppose, for example, you own 30 per cent of the shares in a company and your spouse owns another 30 per cent. The Revenue will value your 30 per cent as worth half the value of a 60 per cent controlling interest, which is generally higher than the value of a 30 per cent minority interest.
The government has made clear that it is prepared to introduce new tax charges like the pre-owned assets tax to ensure that successful tax-avoidance schemes do not after all save tax.