If you give something away but keep benefiting from it, the law treats it as still yours for inheritance tax. The seven-year clock never starts, and the full value is taxed in your estate when you die. This is a gift with reservation of benefit, and it catches more families than almost any other rule.
The classic example
Parents put their home into their children's names, and carry on living in it, paying nothing. They believe that after seven years the house is out of their estate. It is not. Because they kept the benefit of living there, the house is counted in full when they die, as though the gift had never happened.
How the law decides
The rule is in section 102 of the Finance Act 1986. A gift is caught if either:
- the person receiving it does not genuinely take possession and enjoyment of it, or
- you are not excluded, or virtually excluded, from any benefit from it.
If you are caught, the asset stays in your estate. If you later stop benefiting, the gift is treated as made at that point, and the seven-year clock starts only then.
When you can keep a benefit
There are narrow exceptions:
- Paying full market rent. If you pay the new owners a proper, commercial rent and keep paying it, you are not reserving a benefit.
- Sharing the home. Giving a share of your home to a child who lives there with you, and sharing the costs, can fall outside the rule.
- A change in circumstances you did not plan. If you later need to move back into a property you gave away because you can no longer look after yourself, and the occupation is by a relative who provides reasonable care, the benefit may be ignored.
Even where the rule does not apply, a separate income tax charge, the pre-owned assets charge, can apply to benefits from things you once owned. The two rules work together, and both need checking.
Planning before you give
- Give only what you can genuinely do without. A gift you still need is not a gift.
- If you need an income or a home, plan for that first. Some trust arrangements are designed for people who want to pass on growth while keeping an income; they need advice before any money moves.
- Write down what you intend, and keep records of what you give and when.
- Never assume a transfer into a child's name settles it. It is what happens afterwards that the law looks at.
A situation we see
In 2012, Margaret transferred her home, then worth £450,000, into her son's name. She carried on living there, rent free, until she died in 2026.
Because she kept living there, the gift was ignored for inheritance tax. The house was counted in her estate at its value when she died, £650,000, exactly as if she had never given it away.
There was a second cost. The house was never her son's home, so when he sold it, he paid capital gains tax on the rise in value since 2012. The family paid inheritance tax and capital gains tax on the same house, and saved nothing.
This is an illustration. The people and figures are invented, but the situation is one we see.
Where to start
The Wealth R.I.S.C.™ Assessment looks at what you can give away safely, and how, before anything moves.
Questions people ask about this
What is a gift with reservation of benefit?
A gift you keep benefiting from, such as a home given to your children that you carry on living in. It is treated as still part of your estate.
Can I give my house to my children and still live there?
Only if you pay them a full market rent, or the arrangement falls within one of the narrow exceptions. Otherwise the house stays in your estate.
Does the seven-year rule still apply?
Not while you are benefiting. The clock starts only when the benefit ends.
Related
What happens to gifts you make.
The perils to watch for.
Why inheritance tax should be paid once.
Three steps, with room to stop
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1. Start with five questions and a short call
Answer five questions and choose a time for a 20-minute video call with Richard. Your answers are read beforehand, so the conversation starts with your situation.
The call goes over everything first: what your situation needs, whether the assessment is worth having for you, and the fee.
Where a straightforward piece of work would cover it, or nothing needs doing at present, you will be told so.
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2. The assessment: one hour, four steps
An hour on video, worked through the four R.I.S.C.™ steps, then a written report explaining your position, the options and the reasoning behind the recommendations.
Once it is booked and paid for, you complete a short questionnaire and an identity check, so the hour is spent on your position rather than on collecting facts.
The assessment looks at the relevant legal and tax questions together, so you can understand what is necessary, what may help and why.
We aim to send your written summary of the findings and recommendations within three working days of the assessment meeting.
The report is yours to keep. The assessment is paid work in its own right; its fee is not deducted from subsequent work. Fees for this and all other work are set out in the price guide.
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3. Decide what happens next
Take time to consider the recommendations.
You can act on the report yourself, ask Richard to carry out further work, or stop there.
If you proceed, the scope and fixed fee are agreed in writing before work begins.
You deal with Richard throughout
You should be able to ask why something is recommended and receive an explanation you understand.
You work directly with Richard Ansah TEP, from the first conversation through to the completed documents.
Richard is a full member of STEP and a member of the Society of Will Writers.
ONCE is an independent estate planning practice, not a firm of solicitors. Where your circumstances require another professional, Richard will explain why.
Ready to get this sorted?
Five questions, then a twenty minute call that goes over everything first: what your situation needs, what the assessment involves, the fee, and whether you need us at all.
Get in touch
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