Mitigating Inheritance Tax (IHT) through lifetime gifts requires particular care, especially regarding the frequently misunderstood rule: Gifts with Reservation of Benefit (GWROB). While Potentially Exempt Transfers (PETs) typically allow gifts to become IHT-free if the donor survives seven years, these provisions are overridden when benefits are retained, a nuance that often catches individuals off guard.
The distinction proves critical in common scenarios, such as gifting a home while continuing to live there, where the property’s full value remains in the donor’s estate despite the transfer. With recent reforms in the Autumn Budget 2024 increasing HMRC scrutiny, understanding these rules has become essential for effective estate planning.
At DS Burge & Co, we provide specialised inheritance tax advice to help clients structure gifts correctly, whether reviewing existing arrangements or planning new transfers. Our expert team ensures assets are passed on tax efficiently while avoiding GWROB pitfalls.
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What is a Gift with Reservation of Benefit?
Covered under Section 102 of the Finance Act 1986, a Gift with Reservation of Benefit (GWROB) is legally defined as ‘a gift that is not fully given away because the person making the gift (the donor) keeps back some benefit for themselves’.
To simplify, GWROB occurs when you give away an asset but continue to use or benefit from it. Under UK inheritance tax rules, this means the asset has not truly left your estate for tax purposes.
HMRC’s Tax Position on GWROB
HMRC has stringent rules concerning GWROB arrangements. These are:
- A gift can only be transferred for inheritance tax purposes if you give up all benefits
- Any retained benefits mean the asset remains part of your taxable estate
These rules apply regardless of:
- The relationship between the donor and recipient
- The reasons for keeping the benefit
- How long ago the gift was made
Failure to comply with the correct transfer rules will trigger GWROB, which means that any gifted assets will be applicable in the IHT calculation.
The Seven-Year Rule and GWROB Exceptions
The relationship between GWROB and the Seven-Year Rule for potentially exempt transfers (PETs) is an important aspect that is often misunderstood. The full tax relief is applied on applicable gifts, assuming the donor lives for longer than the seven-year period. If the donor passes away before the seven-year period, the gift will be included as part of the estate, and IHT might be payable. The IHT charged is based on the years that have passed since the transfer at the given taper relief %. You can see the full taper and tax relief breakdown in our article on Common Inheritance Tax Myths.
The Seven-Year Rule does not apply where there is a reservation of benefit. In cases of GWROB, the asset remains in the donor’s estate indefinitely until the reserved benefit ceases. Only from this point onwards does the Seven-Year Rule time period begin.
For example:
A frequent GWROB scenario occurs when parents gift their primary residence to their children but continue living in the property without paying market rent.
For instance, let’s assume donors (the parents) transfer legal ownership of their £500,000 home to their children while continuing to live in the property. Despite the change in ownership, since the donors continue to benefit from living in the property without paying appropriate rent, HMRC considers the entire £500,000 value to remain part of their estate for inheritance tax purposes.
In such circumstances, the only ways to avoid creating a GWROB would be for the parents to vacate the property completely or to establish a formal rental agreement at the full market rate, with proper documentation of regular payments.
Tax Consequences of GWROB
Continuing to benefit from transferred assets triggers GWRB, which presents significant tax consequences, as follows:
- The Seven-Year Rule for potentially exempt transfers does not apply
- The property’s full market value remains chargeable to inheritance tax
- The estate may still incur a 40% tax charge on the property’s value
How Gift with Reservation of Benefit Works
The Gift with Reservations of Benefits applies to a range of assets and arrangements. The most common cases relate to property, particularly when elderly parents gift family homes to their children but continue to live in the property, whether out of necessity or convenience. HMRC has consistently upheld its legal position that any such arrangements constitute a reservation of benefit, regardless of the parent’s intentions.
The gifting of shares or financial assets is another transfer that frequently arises GWROB. For instance, transferring shares to children but retaining dividend income constitutes a clear reservation of benefit. Similarly, gifting a buy-to-let property while keeping the rental income or transferring a family business but continuing to draw director’s fees can trigger GWROB provisions.
GWROB can be inadvertently created in less obvious situations. For instance, a grandparent gifting a classic car to a grandchild but being insured on the vehicle and occasionally borrowing it for the weekend could create a GWROB. Even intangible assets like intellectual property can fall under these rules if the donor continues to benefit from royalties or licensing fees.
How to Avoid Gift with Reservation of Benefit
It is possible to avoid Gift with Reservation of Benefit while still achieving inheritance tax savings, although this requires thoroughly thought-out planning.
Solution 1: Paying Market Value Rent by the Donor to the Donee
For gifts that involve property, the most straightforward solution to avoid GWROB is for the donor to pay the recipient full market rent for the use of the property. The rent paid must reflect the true market rate, typically 3-5% of the property’s value annually. It is important to retain records to provide evidence to HMRC, such as a tenancy agreement and bank records showing regular rental payments.
For example, let’s assume a mother gifts the family property to her son. She continues to occupy the house after the transfer of assets, but she pays her son £1,200 per month (market value rent). By making regular rental payments for the property, the property will no longer be considered under a gift with reservation of benefit. This will enable the seven-year gifting rule to be implemented, allowing for tapered relief of IHT.
If the donor (mother) stops paying rent on the property while continuing to benefit from the asset, any tapered tax relief will be lost. Therefore, it is important that the donor carefully considers whether they have the financial allowances to make rental payments for the foreseeable future.
For the donee, rental payments can provide financial security for maintenance while removing the property from IHT upon the death of the donor. However, regular rental payments do present further implications that need to be considered.
Income Tax:
The rental payments made to the donee are classed as income and, therefore, must be disclosed to HMRC through a self-assessment tax return. Assuming the donee has used their personal tax allowance through employment, income tax will be payable. If the donee is an additional rate taxpayer, a higher rate tax on rental payments may mean that, in the long term, it is financially beneficial for the property to remain as part of the estate or peruse other IHT mitigation methods.
Capital Gains:
If the property continues to be lived in solely by the donor or if the property is not the main residence of the donee, then any future sale of the property could trigger a Capital Gains Charge (CGT). Any increase in property value from the date of transfer to the sale of the property will require Capital Gains Tax to be paid. You can read more about these changes in our dedicated article: UK Tax Rates, Tax Allowances and Tax Bands 2025/26.
Property Regulation:
Renting the property back to the donor means that the donee is now legally acting as a landlord. As a result, the donee will be required to carry out gas certification, electrical tests and Energy Performance Certification on the property. In addition, the donee will likely have to obtain landlord insurance for the property and be legally liable for any maintenance. While these costs can be deducted through self-assessment, they do present additional work.
Solution 2: Excluding the Donor from benefiting from the Gifted Asset
HMRC have confirmed that where the benefit to the donor is ‘insignificant’ in relation to the gifted property, a GWROB will not arise. By virtually excluding the donor from any benefit of the gifted asset and by following guidance, individuals are able to avoid triggering Gifts with Reservation of Benefit.
The following reasons will not trigger GWROB:
- The donor gives a property to a donee, and the donor stays with the donee for less than 30 days annually. Known as a time-limited occupation right, this can be an ideal solution for donors who require temporary accommodation or holiday visits.
- The donor stays in the property in the absence of the donee for less than two weeks of the year.
- The donor visits the property for domestic or short-term purposes.
As long as the donor remains within the prescribed HMRC limits, no GWROB will arise on gifts to the donee. Published interpretation is available by HMRC, providing examples for a wide range of situations in which GWROB would not arise. You can read the full guidance in HMRC’s Manual.
Solution 3: Consider alternative means to reduce IHT
The aforementioned solutions for preventing GWROB might not be appropriate or financially beneficial for many individuals. It is important to carefully consider the full range of options available to minimise potential inheritance tax liability. For more information, read our article on How to avoid Inheritance Tax.
GWROB vs POAT – The Key Differences
While both GWROB and Pre-Owned Asset Tax (POAT) are designed to address situations where donors retain benefits from assets they no longer legally own, the two regimes operate through fundamentally different mechanisms. For effective tax planning, it is crucial to understand the distinctions between the two regimes and their consequences for estate planning.
Comparison of GWROB vs POAT:
| Comparison Point | Gift with Reservation of Benefit | Pre-Owned Asset Tax |
|---|---|---|
| Governing Legislation | Finance Act 1986 | Finance Act 2004 |
| Type of Tax | Inheritance Tax (40% on death) | Income Tax |
| When It Applies | When continuing to benefit from a gifted asset | When using a formerly owned asset |
| Valuation Method | Full asset value included in the estate | Benefit value: Market rate rent 5% Capital Value HMRC Interest |
| Planning Solutions | Rental payment to Donee Cease use of asset Alternative structure | Elect to pay IHT Restructure arrangements |
| Time Considerations | Applies indefinitely while benefit continues | Annual charges while benefit continues |
Conclusion
Gifts with Reservation of Benefit (GWROB) and Pre-Owned Asset Tax (POAT) represent two of the most technical areas of inheritance tax planning. Even well-intentioned arrangements can create significant liabilities. Understanding these rules is essential for anyone considering substantial gifts or asset transfers, particularly involving property or income-generating assets.
It is vital that proper documentation is maintained and that the long-term consequences of GWROB are considered. With careful planning and structuring, it is possible to minimise inheritance tax liability for the next generation while remaining compliant with HMRC’s stringent requirements.
Due to the complexity of IHT choices available, it is highly recommended that you seek financial advice and early consultation towards your inheritance tax planning. Our inheritance tax specialists can help structure your arrangements to minimise your IHT exposure while ensuring you have the flexibility to benefit from assets. Speak to one of our expert team today.