Tax is something we’d all like to avoid paying, and when it comes to inheritance tax it is a burden we’d like to ease for the loved ones we leave behind.

There will always be the person in the pub, or on the train, talking about the latest idea of getting out of paying some tax.  When it comes to inheritance tax their favourite is giving property to beneficiaries and thinking this is a great way around it.

this blog is aimed at helping you AVOID a major schoolboy error when it comes to what the tax man regards as, making a gift with reservation OF benefit.

What is a gift with reservation or benefit?

In simple terms – it’s a gift that isn’t actually a gift.

This situation and the example we’re about to share is specifically referenced on the HMRC website.  This isn’t a secret, its publicly available information, that anyone can find.

A gift with reservation is where somebody has given away their home to somebody else in the family to try and avoid inheritance tax, and they continue to live in it. What this means is they are reserving a benefit – they still get the benefit of shelter, warmth, a kitchen and bathroom, a place to live.

The problem is the tax man sees this as you’re making gift which is not a gift. They will disallow it, and they will treat that property as part of your estate and your executor will have to pay inheritance tax.

How do you not reserve a benefit if you want to do this?

To not reserve a benefit, you need to pay for the benefits you retain:

You need to document the fact that you’ve identified what the market rate is for rent, and that you are paying the market value for rent to the people you give you home to – your beneficiaries.

This means they’ve got to declare it on their tax return, and they’ve got to pay tax on that income at their highest marginal rate.

If you’re not paying rent, HMRC will see through this.  It is an ineffective way of trying to avoid paying IHT, and it doesn’t work.

Do not make a gift with reservation benefit. Instead, get together with your financial advisor and talk about it in more detail, about what you’re trying to achieve and what HMRC will accept as legitimate.

Professional advice to explore strategies which can help you mitigate that tax Bill and pass on more to your children, will put you in a better position than thinking you can dodge the inevitable.

Taylormade Financial Management is a long established Independent Financial Advisory practice and well equipped to help you tackle your financial planning problems.  Our mission is to provide first-class financial planning advice to individuals, companies and trustees.

Important Disclosure: content provided does not consider individual circumstances and does not constitute personal advice.  The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.