Inheritance tax of £176k demanded from family due to frequent blunder in gift-giving - ways to evade it
A family has been hit with a hefty inheritance tax bill of £176,000 following a court judgment, all due to misreading the rules on gifting. The Chugtai family's belief that gifting property and placing it in a trust would bypass inheritance tax proved to be a costly miscalculation.
After gifting the property, father Mohammed Chugtai found himself residing in the house with his daughter due to her deteriorating mental health, leading to complications under inheritance tax rules. HMRC successfully pursued this case as it was ruled that the property fell under the category of 'gifts with reservation of benefit' (GROB).
Claire-Louise Smith, a chartered legal executive at Pearson Hards solicitors, highlighted that errors connected to GROB are becoming increasingly problematic for families. With advice frequently available online, it's essential to tailor solutions to individual situations to avoid these potential pitfalls.
Gift with Reservation of Benefit (GROB)
A GROB refers to a scenario where someone gifts an asset, such as a property, but continues to derive a benefit from it. For instance, living there rent-free or retaining ownership of valuable items like art or antiques. Retaining a benefit means the gifted asset remains part of the donor's estate, contributing to the inheritance tax calculation.
Possible situations triggering GROB rules include:
- Residing in a gifted house without paying full rent
- Using a gifted holiday home regularly for free
- Keeping gifted items, such as art or antiques, in the donor's home
Smith emphasized that many families opt to transfer assets to family members to bypass inheritance tax, but retaining a relationship with the property leads to a GROB classification, leaving IHT payable.
The Court Ruling
The court determined that Chugtai had continued to benefit from the property after gifting it, agreeing with HMRC that it should be included in his estate for inheritance tax purposes. At the court hearing, the family attempted to argue that the gift was made more than seven years before their father's death, thus it should be exempt from IHT calculations. They also claimed that Chugtai had no choice but to return to the property due to his daughter's ill health. However, HMRC successfully contested that Chugtai had benefited from the property and, consequently, IHT was payable.
Preventing GROB and Inheritance Tax Pitfalls
To evade a GROB and clear the way for effective gifts, Smith advised the following steps:
- Transfer Full Ownership and Benefit:
- Ensure possession and enjoyment of the gifted asset is fully transferred to the recipient.
- Pay Market Rent or Value:
- If you wish to retain use of the gifted asset, pay a market rate for this privilege to eliminate the reservation of benefit.
- Consult a Professional:
- Before making significant gifts, seek the guidance of a solicitor or tax adviser to avoid unintended tax consequences.
- Review Your Situation Regularly:
- If you believe you have broken GROB rules, consult a professional promptly to assess the impact on your case.
Start paying rent now to minimize potential problems moving forward. It's better to address issues sooner rather than leaving surprises for your loved ones later on.
Smith encourages those trying to minimize inheritance tax through gifting while adhering to the complex GROB regulations. With the right planning and advice, families can steer clear of these complications.
- After being ruled that he continued to benefit from the property even after gifting it, father Mohammed Chugtai might have benefited from paying market rent for residing in the house, to avoid the 'Gifts with Reservation of Benefit' (GROB) classification and the subsequent inheritance tax (IHT).
- Following the Chugtai family's costly miscalculation, it's crucial for families seeking to avoid potential inheritance tax pitfalls to consult professionals, such as solicitors or tax advisers, before making significant gifts, as this can help them steer clear of complex GROB regulations and ensure effective gifts.
