For many families, transferring property to children or other relatives is a common way to plan for the future and reduce inheritance tax liabilities. However, if the original owner continues to live in the property without paying a commercial rent, this arrangement can inadvertently fall under HMRC’s gift with reservation of benefit rules. Understanding how this works is essential for anyone considering property gifting in the UK.
What Is a Gift with Reservation of Benefit?
A gift with reservation of benefit occurs when someone transfers an asset, such as a property, but continues to enjoy some benefit from it. Common examples include living in the property rent-free, retaining the right to receive income from the asset, or using it in a way that provides ongoing personal benefit. HMRC treats these gifts differently for inheritance tax purposes. The value of the benefit retained may be considered part of the estate, potentially negating the tax advantages of the transfer.
For instance, if a parent gifts a house to a child but continues to live there without paying market rent, HMRC may classify this as a gift with reservation of benefit. Even though the legal ownership has changed, the parent still enjoys the benefits, which can impact inheritance tax calculations.
Common Scenarios That Trigger a Gift with Reservation of Benefit
Several scenarios can unintentionally trigger a gift with reservation of benefit:
- Living in the property rent-free – The most common example. The parent or original owner continues to occupy the house without paying a fair rent.
- Retaining income rights – If the gifted asset generates income, such as rent from tenants, and the donor continues to receive it.
- Partial gifts with retained control – Retaining control over who can use the property or when it can be sold may also be treated as a reserved benefit.
Understanding these triggers is crucial for families who want to gift property without incurring unexpected tax liabilities.
How to Avoid Issues with Gift with Reservation of Benefit
Proper planning and professional advice can help minimise the risks:
- Pay a market rent – If the donor continues to live in the property, paying a fair rent can prevent HMRC from classifying it as a gift with reservation of benefit.
- Consider alternative transfers – Use trusts, loans, or other structures to ensure the benefit is not retained.
- Seek expert guidance – Tax laws are complex, and small oversights can lead to significant inheritance tax exposure. Professional advice ensures compliance and effective estate planning.
Also Read: Family Investment Companies
Conclusion
Living in a property rent-free after gifting it may seem harmless, but it can trigger a gift with reservation of benefit, potentially negating inheritance tax advantages. Awareness and careful planning are key to ensuring that property gifts achieve the intended benefits.
