What is the difference between a Gift with Reservation of Benefit and a Potentially Exempt Transfer?
Wanting to give money to your children is a natural instinct.
When you make a substantial gift, usually money or property, in your lifetime it may still count towards the value of your estate for Inheritance Tax (IHT) purposes.
There are two different types of gift and you need to be aware of the possible tax implications if you’re planning to part with some of your money before death.
A GIFT WITH RESERVATION OF BENEFIT (GROB)
When you make a gift but retain some benefit from it, that is classed as a GROB. The most common example is where you intend to sign over your house to your adult children (who live elsewhere) but continue to live in it.
The value of your house will still be included in the calculation of the value of your estate for IHT purposes. Worse still, you may even give your children a Capital Gains Tax liability.
A POTENTIALLY EXEMPT TRANSFER (PET)
If you make a gift to someone and do not retain any benefit, and survive for seven years after making it, the gift is not included in any IHT calculation.
However, if you should die within seven years of making the gift, then it will form part of your estate for IHT purposes and some, or all, of the IHT may be payable.
A GROB can become a PET where, for example, the you move out of your home and retain no benefit in it. At that point, it becomes an outright gift to your beneficiaries and if you survive for a further seven years, then its value will not be included in IHT calculations.
EXCEPTIONS TO THE GROB RULE
If you pay full market rent for the house after it is gifted, or do not occupy the property, then it will not be classed as a GROB. You need to be careful considering this option as the rent is likely to attract tax. If you wish to give a share of your home to your adult children while they live there, the gift may be exempt in certain circumstances.
The rules around gifts can be complicated and it is recommended that you have professional advice before trying to distribute assets, particularly if you’re trying to protect your home from being sold to fund care home fees.
Gifts given in good faith could later attract substantial IHT, which your estate executor or administrator would be required to account for.
At Barnet Wills, we will be able to identify the best way to ensure that your assets are passed to those you would like to benefit from them.
For more information contact Barnet Wills on 0203 189 1737 or email firstname.lastname@example.org
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