What is a gift with reservation of benefit?

Generally, giving away money or property during lifetime reduces the size of an estate on death, which can mean less (or no) inheritance tax.

There are two main exceptions:

1. The “seven year rule”, which states that gifts made in the seven years before death may be counted towards to estate after death. See our guide “Gifts made within seven years of death”.
2. Gifts with reservation of benefit.

What are gifts with reservation of benefit?

If a deceased person made a gift during their lifetime, its value could be added to their estate on death if they kept back some sort of benefit. This is “reservation of benefit”.

For example,

1. A parent gives his house to his children, but the parent continues to live in the house rent free.
2. A brother gives some valuable antique furniture to his sister, but keeps the furniture in his living room for the time being.

In the first example, if the parent transferred the house to their children but paid full market rent, there would be no reservation of benefit.

Inheritance tax implications

If there has been a gift with reservation of benefit, the value of that gift may be added to the deceased’s estate. This may result in more inheritance tax.

The inheritance tax implications can be significant. Taking the first example above, if the parent’s house is worth £200,000, this figure could be added to his estate after his death.

Return of estate information (IHT205)

If any gift with reservation of benefit was made by the deceased on or after 18 March 1986, it is not possible to complete the IHT205. The IHT400 must be completed instead.

What is the purpose of the rule?

The purpose of the rule is to stop people arbitrarily reducing the size of their estates and, by doing so, avoiding inheritance tax.