A family has been ordered to pay £176,000 in inheritance tax by the court after wrongly interpreting gifting rules, which they thought would mean they avoided a bill after their father died.
The recent case successfully brought by HMRC involved the estate of Mohammed Chugtai who had given away one of his properties and placed it in a trust, in a bid to try to lower the inheritance tax (IHT) payable by his family.
After gifting the property, he was required to return to live there with one of his daughters due to her deteriorating mental health, which meant she could not leave the property.
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This fell foul of inheritance tax rules about ‘gifts with the reservation of benefit’ (GROB).
Claire-Louise Smith, chartered legal executive at Pearson Hards solicitors, said in her experience, errors with GROB rules is a “growing problem” for families.
“We are currently seeing issues with gifts of reservation of benefit when the person has passed away and we are instructed to obtain a grant of probate to administer the estate,” she told MoneyWeek.
“The deceased may have thought their actions will mean less inheritance tax will be payable on their death, but this is not always the case.”
Smith said she ends up explaining the situation to the children of the deceased who then have to settle tax they did not think they would have to pay.
“This is certainly a growing problem as more information is available on social media but might not be tailored to the individual’s situation,” she said.
What is a gift with reservation of benefit?
A GROB, or gift with reservation of benefit, refers to a situation where someone gifts an asset, like a property, but retains some benefit from it, such as living there rent-free.
This retention of benefit means the gifted asset is still considered part of the donor's estate for IHT purposes, even after the gift is made.
GROB rules could be triggered if for example:
- You give your house to your children but carry on living there without paying full rent.
- You gift a holiday home but still use it regularly for free.
- You transfer valuable items (like antiques or art) but keep them in your home.
“This catches out a lot of families who wish to try to avoid inheritance tax rules, and preserve a person’s assets, by transferring them into the name of family members,” said Smith.
“If the person is going to remain living at the property, then it will be deemed a GROB and unfortunately IHT is still payable.”
The court ruled Chugtai had benefited from the property after he had gifted it. Therefore it agreed with HMRC that it should form part of his estate for inheritance tax purposes.
At the court hearing, the family had tried to argue the gifting decisions had been made more than seven years before their father’s death, so the value of the trust should not be part of IHT calculations.
Gifts which are made seven years before someone dies are generally excluded from IHT.
The family also argued Chugtai had no choice but to return to the property due to his daughter’s ill health.
However, HMRC successfully claimed he had benefited from the property and so it should be included and IHT was payable.
How to avoid breaking GROB rules
To avoid a GROB and make sure the gift is effective, Smith said you can do the following:
- Give it away fully – and stop using it or benefiting from it.
- If you want to keep using it, pay the new owner a full market rent, just like any tenant would.
- Take advice before making big gifts – what feels simple can have unexpected tax consequences.
If you think you have broken GROB rules, then Smith advised speaking to a solicitor or tax adviser to check whether the rules apply to you.
If you're still using something you've gifted, you may be able to start paying rent now to help reduce the problem going forward – it’s better to put things right now than leave surprises for your family later on.
Smith said: “Gifting assets can be a great way to help your family and reduce inheritance tax — but it’s easy to get it wrong.
“The rules around GROB are complex, but with the right planning and advice, you can avoid the pitfalls.”
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