What is a gift with reservation of benefit for IHT purposes?

Full answer

The Gift with Reservation of Benefit (GROB) rules are anti-avoidance provisions in the Finance Act 1986 designed to prevent people from reducing their estate for IHT purposes while continuing to enjoy the asset they have given away. A GROB occurs when: (a) you give property to another person, AND (b) you retain a benefit from that property, OR the property is not enjoyed by the recipient to the entire exclusion of the donor and of any benefit to the donor. The most common example: you give your house to your adult children but continue to live there without paying rent. The gift fails for IHT purposes -- the house remains in your estate as if you had never made the gift. The 7-year potentially exempt transfer (PET) clock does not start. Other common GROBs: giving a holiday home to children but continuing to use it during the summer; giving shares in a company to children but remaining as a director and drawing a salary above market rate; placing property in trust with yourself as a potential beneficiary. How to avoid GROB status: 1. Move out: if you give away your house and genuinely move out with no right to return, this is not a GROB. The gift becomes a PET from the date you move out. 2. Pay full market rent: if you gift the house to your children but pay them market rent (fair commercial rent) from the date of gift, the reservation of benefit is released. The gift becomes a PET from the date market rent starts. Your children pay income tax on the rent received. 3. The changed circumstances exemption: if you gave property away without reservation, but later need to move back due to infirmity or old age, HMRC may accept this does not create a GROB if it represents a reasonable change in circumstances. Pre-Owned Assets Tax (POAT): a separate charge introduced in Finance Act 2004 (effective 2005). Even where a GROB technically does not exist, if you previously owned an asset that you now benefit from (having divested it), HMRC may charge an annual income tax charge (POAT) based on the market rental value of that benefit. POAT catches structures that avoid GROB technically but achieve the same economic result. You can elect out of POAT by bringing the asset back into your estate (reversing the GROB position). Property in trust: the GROB rules apply to trust arrangements too. If you set up a trust and are a potential beneficiary, the trust assets may be treated as in your estate under the GROB rules or the associated operations rules. Specialist legal and tax advice is essential for any home-gifting strategy.

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