The Myth: I can gift an asset and still use it

Unfortunately, as many families have found out to their detriment, gifting an asset whilst retaining a benefit negates the value of the gift. Indeed, it can have an adverse effect on the overall taxation of a person’s estate.

Such a gift is caught by the Gift with Reservation of Benefit Rules which, despite being introduced in 1986, are still catching families out today. The rules state that if you make a gift, but retain any benefit, the gift will fail, and your estate will be treated as still owning the gift so far as inheritance tax is concerned. The benefit retained can be less than 1% of the original gift, but if any benefit is retained, the total value of the asset will be caught by these rules.

What is a benefit?

The definition of a benefit depends upon the nature of the asset. For example, gifting your house to your children and living in it rent free will be a benefit. Gifting monies but receiving the income from those monies is also a benefit. Similarly, gifting a share portfolio whilst still receiving the dividends (even indirectly) will be classed as a benefit.  It does not matter whether you gifted the asset to your children directly, or via a trust, if you retain any benefit after making the gift, you will be caught by these rules.

Many a time during my career I have come across a family whose parents gifted their house into a family trust or “asset protection trust” whilst living in it after the date of the gift, believing, wrongly, or being ill advised, that this will take their property out of their estate. In fact, the opposite is true, and it can make the children’s tax position much worse.

The solutions

There are several solutions to gifting assets away, for example making use of the annual exemption or the gift out of income exemption can reduce the value of your estate, provided you do not retain a benefit from those gifts. There is one exception with regards to gifting assets into a trust whilst retaining a benefit and this is known as a Discounted Gift Trust. Under this arrangement, you can withdraw 5% of the original value of the capital gift placed into trust, tax free for the first 20 years (any further withdrawals after 20 years will be taxable). Despite that fact that technically you are benefiting from the original gift, this trust is not caught by the gift with reservation rules and has been specifically excluded by statute.

Currently, seven years after making a gift the asset will fall out of your estate. However, under a Discounted Gift Trust, an agreed percentage of the amount gifted will fall out of your estate immediately, even if you were to pass away the day after making the gift. It is not possible to state what the discounted percentage will be as the percentage is dealt with on a case-by-case basis and agreed between the company through which the trust is made and the Government. The discount that is applied varies from person to person, depending upon their individual circumstances.

The contents of this article are correct at the time of publication, and an update will be released after the Budget. Some of the rules discussed above might be changing and if the speculation is correct, the time period after which a gift falls out of your estate might be increased.

For more information concerning gifting assets, please contact a member of our Private Wealth Department: Rhea Rughani (TEP), Colin Glass or Vincenzo Mazzone.

The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.