Gifts with Reservation of Benefit

Lifetime gifting is a powerful way to reduce inheritance tax, but only if the gift is genuine. If you give an asset away yet continue to enjoy it, the law takes the view that you have not really given it away at all. These are the gift with reservation of benefit (GROB) rules, and they can undo years of planning in a single stroke.

What the Rules Say

When you give an asset away and keep a benefit from it, the asset remains part of your estate for inheritance tax purposes. This applies even if you survive for seven years, because the clock does not start properly until the benefit comes to an end.

The classic example is giving your house to your children but carrying on living in it rent-free. The children own the house, but you have reserved the benefit of living there, so the full value of the property is still counted in your estate when you die. The gift achieves nothing for inheritance tax.

What Counts as a Benefit

A benefit can be direct or indirect:

• Living in a property you have given away, even rent-free
• Receiving income from shares or a business you have transferred
• Retaining the use of a valuable chattel, such as a boat, a painting or a classic car
• Giving money to someone who buys a home you then move into
• Placing a condition on the gift that lets you keep control of it

The law also looks at indirect benefits. If you give your child a sum of money and they use it to buy a house that you then live in, HMRC can treat the arrangement as a reservation, because the money you gifted has effectively bought your home.

The Three Ways to Avoid the Trap

A gift with reservation can usually be fixed or avoided by making the gift complete, which means giving away the asset and the enjoyment of it.

Pay a Full Market Rent

If you want to pass on your home but continue living in it, you can pay a full commercial rent to the new owners. Paying a proper market rent, reviewed regularly, means the benefit is no longer reserved. A token amount will not work.

Move Out Completely

The cleanest answer is to cease benefiting from the asset. Move out of the gifted property, stop taking dividends from gifted shares, and hand over full control. Once the benefit stops, the gift is treated as made from that date and the seven-year clock starts running.

Use a Properly Structured Trust

A trust set up and run correctly can remove assets from your estate without leaving you with a reserved benefit. This is a technical area where the trusts guide is a useful starting point, and professional advice is essential before going down this route.

Special Cases

Gifts into Trusts

Special rules apply to gifts into certain trusts. Where the donor retains an interest in a trust they settled, the trust assets can remain within the estate. The life interest trust guide explains one structure where the settlor can receive income without triggering a reservation.

Land Given Away with the Donor in Occupation

There are limited exceptions where land is given away and the donor continues to live on it, provided the donor receives no benefit from the occupation and the arrangement does not amount to a reservation. These cases are narrow and fact-sensitive, and should be checked by a specialist.

What If You Pay Rent but the Amount Is Low

Paying rent at below the market rate does not end the reservation. The test is whether a full commercial rent is paid for the benefit received. Anything less leaves the asset in the estate.

GROB and the Seven-Year Rule

A gift with reservation does not benefit from the seven-year rule. The period only starts once the reservation ends. So a parent who gives their home to a child but lives there for ten years before moving out, then dies a year later, is treated as having made the gift one year before death. The home remains in the estate.

This makes GROB gifts particularly dangerous: they appear to be planning, but they deliver no inheritance tax saving until the benefit genuinely stops.

The Overlap with Pre-Owned Asset Tax

The GROB rules are not the only charge to worry about. Where a donor benefits from an asset but the arrangement falls outside the GROB rules, a separate annual income tax charge called Pre-Owned Asset Tax (POAT) can apply instead. If you are considering any arrangement where you give something away but continue to enjoy it, read our pre-owned assets tax guide before committing to anything.

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