What is a gift with reservation of benefit for Inheritance Tax?

Full answer

The gift with reservation of benefit (GROB) rule is one of the most important anti-avoidance provisions in Inheritance Tax planning, and catches out many people who try to give away their home while continuing to live in it without paying anything for that continued use. **The basic rule** Normally, a lifetime gift falls entirely outside your estate for Inheritance Tax purposes if you survive 7 years after making it (a Potentially Exempt Transfer, or PET). However, if you continue to benefit from the gifted asset in any meaningful way -- most commonly by continuing to live in a house you have given away, without paying a full market rent for doing so -- HMRC treats the gift as having a 'reservation of benefit,' and the asset remains part of your estate for Inheritance Tax purposes when you die, REGARDLESS of how many years have passed since the original gift. **Classic example: giving away your house but still living in it** A parent gives their house to their adult children but continues to live in it rent-free (or paying less than a full commercial market rent) until their death. Even if the parent lives another 15 or 20 years after making the gift -- far beyond the normal 7-year PET survival period -- the house is still treated as part of their estate for Inheritance Tax purposes at death, because they continued to benefit from (live in) the gifted asset without paying properly for that benefit. **How to avoid GROB when gifting property you still want to use** There are two main routes to make a genuine gift of a property you continue to occupy without triggering GROB: (1) pay a full, ongoing market rent for continuing to live there (reviewed periodically to stay at true market rate, and genuinely paid, not merely notional), or (2) share occupation genuinely with the new owner (for example, both the parent and the children who received the gift living in the property together as their homes), provided the parent does not receive a disproportionate benefit relative to their ownership share. **Worked example: correctly avoiding GROB** A parent gifts their £500,000 house to their children but continues living there, paying a full market rent of £1,500 a month (a genuine, arm's-length rent reflecting the property's true rental value, reviewed periodically) directly to the children as the new owners. Because a full market rent is genuinely paid, this is NOT a gift with reservation of benefit, and provided the parent survives 7 years from the date of the gift, the house's value falls outside their estate entirely for Inheritance Tax purposes. **What happens if GROB does apply and the person dies** If a GROB gift is still in place when the donor dies, the asset is included in their estate at its value at death (not its value at the time of the original gift), which can actually be worse than never having made the gift at all if the property has significantly increased in value, since the estate is taxed on the higher current value while the donor has also potentially lost other benefits (such as their ability to use the property as security, or simplicity of estate administration) by having given it away. **Why this trips people up** Many people assume simply 'giving away' an asset and surviving 7 years automatically removes it from their estate, without realising that continuing to use or benefit from that same asset without paying properly for it defeats the exemption entirely -- anyone considering gifting a property or other asset they wish to continue using should take professional advice specifically on the GROB rules before making the gift, since the rules are strictly applied and retrospective fixes are often difficult or impossible.

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