Families confront unexpected inheritance tax costs following errors in gifting rules, impacting 220 households
In the world of inheritance tax (IHT), it's crucial to be aware of the potential pitfalls that come with gifting assets. One such issue is the concept of Gifts with Reservation of Benefit (GWR), where the original owner continues to use or enjoy a benefit from the gifted asset.
If you've gifted a luxury car, a vintage wine collection, or valuable artwork and continue to keep them in your garage, HMRC may consider this a GWR, making the assets subject to IHT. Similarly, transferring shares in a family business but retaining control over dividends or voting rights may not truly gift the shares away, potentially leading to IHT.
Common mistakes to avoid with GWR include continuing to live rent-free in a gifted property, receiving income from gifted investments, or retaining physical possession of valuable items. These errors can cause HMRC to treat the asset as still part of the donor’s estate for IHT, resulting in unexpected tax liabilities. For example, gifting a house but continuing to live in it without paying a commercial rent triggers GWR rules, meaning the house remains liable for IHT despite being gifted.
To avoid these pitfalls, the donor must ensure they no longer receive any benefit from the gifted asset. This might involve paying a full market rent for continued use of property or transferring all rights and benefits completely. Clear, formal arrangements and periodic review are advisable, especially for high-value gifts. Seeking expert legal and tax advice before making such gifts is crucial to avoid costly mistakes and surprise IHT bills.
It's also important to remember the seven-year rule, which generally applies to gifts. If the donor survives seven years after the gift, no IHT is payable on it. However, GWR rules override this if the donor retains benefits from the gift, causing the asset to remain taxable in the estate regardless of the seven-year period.
In the tax year 2023/24, HMRC investigated 220 cases of Gifts with Reservation of Benefit. From April 2026, HMRC will start charging IHT on family businesses, and from April 2027, unused pension savings will be subject to IHT.
To protect yourself from potential IHT liability on gifts made during your lifetime, you might consider a Gift Inter Vivos (GIV) insurance. This type of life cover is designed to help individuals protect their loved ones from IHT. The policies are written on the life of the person making the gift, with the amount of cover reducing over the term of the policy to match the reducing IHT liability due to taper relief.
However, it's essential to understand that simply handing over legal ownership of an asset is not enough to satisfy HMRC. GIV policies must be written into trust, otherwise the proceeds could become part of the estate and be subject to IHT. By being written in trust, the proceeds of your policy will be paid directly to your beneficiaries rather than your estate, avoiding IHT.
Remember, it's the responsibility of the deceased's executors to calculate any IHT liability, including gifts made within seven years of death. Failure to correctly calculate IHT liability could result in the executor having personal liability for unpaid tax.
In summary, to avoid GWR-related IHT pitfalls, ensure you no longer receive any benefit from the gifted asset, seek professional advice on complex or high-value gifts, and understand the seven-year rule and GIV insurance policies. By doing so, you can help ensure a smoother inheritance tax process for your loved ones.
Sources: 1. MoneyWeek 2. setfords.co.uk 3. apw-ifa.co.uk
- To prevent unexpected IHT bills, it's advisable to avoid continuing to enjoy benefits from gifted assets, such as housing, investments, or family businesses, as HMRC may consider this a Gifts with Reservation of Benefit (GWR) and tax the assets accordingly.
- While transferring shares in a family business may seem like a gift, retaining control over dividends or voting rights might not meet the requirements for true gift-giving, potentially leading to IHT.
- In the world of personal finance and inheritance tax, understanding financial instruments like Gift Inter Vivos (GIV) insurance can help protect the beneficiaries from potential IHT liability on gifts, especially when the policies are written into trust to ensure the proceeds are directly paid to the beneficiaries rather than the estate.
