Gifts with reservation

A gift must be cleanly made or it may be ignored by the Capital Taxes Office (“CTO”), the part of the Inland Revenue responsible for collecting IHT, under the “reservation of benefits” rule. If you add an adult child as a joint signatory to a savings account, eg., £100,000 Building Society or Bank account, on death you are not deemed to own a half, i.e., £50,000 but the entire account as you could have accessed the entire amount of £100,000 any time prior to your death. Similarly if a home is transferred to children by a parent who continues to reside in the house that gift is deemed to be a gift with reservation, ie., a benefit (residence) continues to be enjoyed by the parent. On the death of the parent 5, 10, or even 20 years later even though the legal estate in the home is in the children, the value of the home at the date of death is deemed still to be in the parent’s estate for Inheritance Tax purposes. Gifts made into trusts of less than the nil rate band for children or grandchildren fall into the same category; they work to start the 7 year period providing the person who makes the gift does not reserve or take any financial or usage benefits out of the trust funds or assets.

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