What is a gift with reservation of benefit for inheritance tax?

Full answer

A gift with reservation of benefit (GWR or GWROB) is an anti-avoidance rule that stops people cutting their inheritance tax (IHT) bill by giving assets away on paper while still enjoying them in practice. Normally, an outright lifetime gift is a potentially exempt transfer: if you survive seven years it falls out of your estate entirely. But if you reserve a benefit -- you keep using, occupying or drawing income from the gifted asset -- HMRC treats the asset as never having left your estate for IHT, no matter how many years pass. The classic example is parents who give their home to their children but carry on living there without paying a full market rent. Because they reserve the benefit of living there, the house is still counted in their estate at death and may be taxed at the standard 40% IHT rate on value above the available nil-rate bands (GBP 325,000 standard, plus up to GBP 175,000 residence nil-rate band where a home passes to direct descendants). Worse, the same value can fall foul of two regimes at once, so professional advice matters. How to avoid the trap: the reservation must genuinely end. For a gifted home, that usually means the donor either moves out entirely or pays full market rent to the new owners, reviewed regularly. If the reservation is released during the donor's lifetime, a fresh seven-year clock generally starts from that release date. There is also a separate income tax charge, the pre-owned assets tax (POAT), aimed at arrangements designed to dodge the GWR rules. Who it affects: anyone trying to pass on a home or valuable asset while continuing to use it, a very common estate-planning mistake. The exact POAT thresholds are not listed here, so check gov.uk. Use an inheritance tax calculator to estimate the liability if the asset stays in the estate.

Try the calculator