Gifting assets during your lifetime can be an effective estate planning tool—but it must be done carefully to avoid unexpected inheritance tax (IHT) consequences.
One of the most common traps is a Gift with Reservation of Benefit (GWROB). This arises where an individual gives away an asset, typically a property, but continues to benefit from it. A classic example would be gifting your home to your children and continuing to live in it rent-free.
Why It Matters?
Under UK rules, a GWROB means the asset is still considered part of your estate for IHT purposes, regardless of legal ownership. In practice, this can result in the asset being taxed on death, defeating the objective of making the gift in the first place.
Can It Be Avoided?
Yes, in some cases. Common exceptions include:
- Paying full market rent for continued use of the gifted asset.
- Gifting to a spouse or charity, which are exempt from IHT.
- Shared occupation: If you give away part of your home and continue to live in it with the new co-owner (e.g. your child), and you each occupy your respective share without deriving a benefit from the other’s portion, a GWROB may not apply. The conditions here can be technical and should be reviewed carefully.
These scenarios must be properly structured and documented to ensure the gift qualifies as genuine in the eyes of HMRC.
What If You’ve Already Made a Gift with Reservation?
If you have already gifted an asset but still benefit from it (for example, continuing to live in a property you have transferred), there may still be planning opportunities.
Releasing a reservation, such as moving out of the property or beginning to pay market rent, can stop the GWROB from applying going forward. However, doing so creates a new potentially exempt transfer (PET) at the time the benefit is given up. If the individual dies within seven years of that point, the PET becomes chargeable to IHT.
It is also worth noting that double charges relief may apply where both the original gift and the retained benefit could theoretically be taxed, ensuring the value is not taxed twice, but usually at the higher amount.
Illustration – Avoiding GWROB by Paying Market Rent
Mr and Mrs James gift their London home to their adult children but continue to live in the property. To avoid the gift being caught by the GWROB rules, they agree to pay their children a full market rent, reviewed annually. The rental income is declared by the children as part of their income tax return.
As long as the arrangement is properly documented and the rent reflects true market value, the property will not be treated as part of Mr and Mrs James’s estate after seven years—potentially saving significant IHT.
A Brief Note on Upcoming IHT Changes
The Spring Budget 2024 announced a shift from a domicile-based IHT system to a residence-based regime, effective from April 2025. This means long-term UK residents, regardless of domicile, may be subject to IHT on their worldwide estate.
This change will bring many more individuals, especially internationally mobile families, within the UK IHT net. As such, gifting strategies (and their interaction with GWROB rules) may become more relevant and should be reviewed in light of the evolving tax landscape.
Next Steps
Gifting can be a powerful part of your estate strategy, but the rules around GWROB are complex. If not handled correctly, a well-intended gift could have unintended tax consequences.
If you are considering passing assets to family members, especially property, we recommend speaking to one of our advisers first by emailing us at hello@dixcartuk.com. At Dixcart, we assist clients with structuring lifetime gifts in a way that aligns with both tax efficiency and family intentions.
