Money Matters: The family home and inheritance tax

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Generally, gifts that allow the donor to benefit in some form are ineffective for IHT purposes.

A gift with reservation may arise where possession and enjoyment of the gifted asset is not taken by the donee to the exclusion of the donor.

In these circumstances the value of the gifted property will remain part of the donor’s estate for IHT purposes, even though the legal ownership may have transferred.

The effect of the gifts with reservation provisions is that an individual transferring their home to another individual or to trustees while continuing to live there will not result in the value of the gifted asset being removed from the donor’s estate for IHT.

However, a gift with reservation may not occur if full market rate rent is paid for continued occupation of the gifted property.

Also a gift with reservation may not occur if the donor gifts part of the property to the donee and both parties reside at the property.

Care needs to be taken such that the donor does not receive any benefit from the gift.

For example, the donee should pay no more than an appropriate proportion of the household running costs.

It is okay for the donor to pay more than their appropriate share, and sometimes they may pay all of the running costs to ensure that no benefit is received in this way.

It is common under these arrangements for no more than 50 per cent of the property to be transferred.

Of course, if the donee was later to move out of the property, a gift with reservation could arise at this time, unless the donor paid the market rent for that part they no longer owned.

Although the above situations may be effective for IHT purposes, they are unlikely to be popular with individuals who have repaid their mortgage and do not wish to pay rent to stay in “their” house for the rest of their lives; or do not wish to have to share their home and undermine their security of tenure.