Gifts with Reservation of Benefit and Pre Owned Asset tax Rules


A few clients have asked me recently to explain some of the rules around gifts and inheritance tax. One interesting rule is the ‘Gift with reservation of benefit rule’. I talk about this a little here.

As you probably know, if you give an asset away and survive for 7 years, then there’s usually no UK inheritance tax to pay. But for this to work, the asset needs to be really given away, the donor can’t give an asset away, but retain benefit, or title.

Gifts with reservation of benefit

The “Gift with reservation of benefit rule” has been around for a long-time.  It’s an anti-avoidance rule that means that if a donor gives away an asset (ie a house) but continues to derive some benefit from the asset (ie continues to live in the house) then the inheritance tax rules ignore the gift, and treat the asset as if it were still owned by the donor at the time of death. The Gift with reservation of benefit rule doesn’t apply if the donor pays for the use: ie pays full market rent to live in the house.

Since the inception of the Gift with reservation of benefit rule, there have been many tax avoidance schemes set up in an attempt to get around it. For example, it used to be possible for the donor could make a gift of cash to the donee and for the donee to then use the money to buy an asset for the donor. For this reason, the Pre-owned Assets rules were introduced.

Pre-owned Asset Rules

The rules mean that in situations like this, where the donor makes a gift of cash and the donee uses the money to buy, say a property, which the donor then enjoys, the donor may fall within a special annual charge to income tax, known as ‘pre-owned assets tax’.

The amount charged to income tax is calculated as the difference between the commercial rent less rent payments actually made. However, there’s no income tax charge if this difference doesn’t exceed £5,000 in a year. If it does exceed this, then the difference needs to be reported on the donors self-assessment tax return and income tax on the difference will be charged at the donor’s marginal income tax rate (20% or 40%). There’s an apportionment provision where the donor pays for part of the funds towards the acquisition of the land.

Other rules

These are just two of the many inheritance tax rules. There are other tax implications when you gift the assets away. If you would like to know more, please feel free to give me a call.

Introduction A few clients have asked me recently to ex […]

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