IHT and Reservation of Benefit: Avoiding the Unexpected

Inheritance Tax (IHT) can create unexpected complications when gifting assets while continuing to benefit from them. The IHT reservation of benefit rule applies when someone gives away an asset but still uses or enjoys it.

Even if legal ownership is transferred, HMRC may treat the asset as part of the donor’s estate, making it subject to 40% inheritance tax upon death.

Avoiding the IHT Reservation of Benefit Trap

If you plan to gift an asset but still want to use it, consider these approaches:

• Paying market rent – If you gift a property but continue living in it, paying full market rent can remove it from your estate.
• Sharing running costs – If the asset is jointly used, covering an appropriate share of maintenance and expenses may reduce tax risk.
• Transferring full control – To remove any IHT reservation of benefit, you must relinquish all rights to the asset, including financial and usage benefits.

By following these strategies, you can ensure that gifted assets genuinely leave your estate for inheritance tax purposes.

Capital Gains Tax Considerations

While managing IHT reservation of benefit, you must also be mindful of capital gains tax (CGT).

• If an asset increases in value after being gifted, the recipient may face CGT when selling it.
• Property gifts, unless to a spouse or civil partner, may trigger immediate CGT liability for the donor.
• Strategic planning ensures that both IHT and CGT implications are addressed effectively.

Proper tax planning prevents unintended costs and maximises financial efficiency.

How We Can Help

Navigating IHT reservation of benefit rules requires careful planning. At Lewis Brownlee, we provide expert advice to minimise inheritance tax and capital gains tax liabilities.

For professional guidance, contact us today. Our team is here to help.