An alternative approach is for the donor to make a conscious decision that any IHT payable as a result of a failed Pet should be paid from their estate and to draft their will accordingly. Legal and tax advice should be taken on the implications of doing so.
After gifting – can you enjoy the use of property or other assets?
Central to the operation of IHT is a complex set of rules, known as the gift with reservation of benefit (Grob) provisions. These block the IHT advantages of making a gift if you continue to benefit from the asset given away.
The underlying principle is that you cannot have your cake and eat it. Even if the Grob rules do not apply it is still possible for other unexpected tax charges to bite.
Although the Grob rules apply to all types of assets it is in connection with gifts of property that their effect is most often seen. The rules require the gifted property to be enjoyed to the entire exclusion, or virtually to the entire exclusion, of the person making the gift.
So what does it mean in practice for the donor to be (virtually) excluded from benefit?
Let’s say mum gives her home to her son who makes it his residence. Mum moves into sheltered accommodation.
She subsequently house-sits from time to time in the absence of her son and his family, but for no more than two weeks each year. She also spends some weekends with her son in her former home but these visits amount to less than one month per year. HMRC has confirmed the Grob rules would not apply in these circumstances.
If, however, mum stays with her son most weekends as she enjoys being with the family, or for a month or more each year, the Grob rules would apply to the gift, even if made more than seven years ago. The entire value of the home would form part of mum’s estate on her death. The son would then find, to his surprise, that he was liable for the IHT attributable to the home.
The main way of dealing with the Grob rules is for full consideration to be paid. Let’s say mum gifts her home to her son and continues living there full-time. Her son remains in his own home.
If mum pays her son a full market rent for her occupation the Grob rules do not apply. This assumes, of course, that mum has the resources to pay a market rent for the occupation of her home.
