My VIP Tax Team question of the week: Gifting a Home

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My elderly widowed client has made no previous lifetime gifts, but wishes to gift his main residence, worth £700,000, to his son as he believes this will save him inheritance tax. After the gift, he will continue to live in the property on his own. Will he have to pay rent on the gift for it to escape his estate, and if he dies within 7 years will taper relief reduce the IHT on his gift?

It seems inevitable from the facts provided that no IHT will be saved unless your client can afford to pay market value rent for the rest of his life.


The legislation for gifts with reservation of benefits (GWROB) can be found between IHTA 1984 s.102-102C, FA 1986 Sch 20, and explained in HMRC manual IHTM14301 onwards. Essentially, it stops people benefitting from gifting assets out of their estate for IHT purposes but continuing to derive a benefit from the asset. FA 1986 s.102 enforces that the property must be enjoyed by the donee “to the entire exclusion, or virtually to the entire exclusion, of the donor” for the rest of the donor’s life.

Taper relief

The legislation and rates for taper relief can be found at IHTA 1984 s.7(4) and the relief is explained in HMRC manuals IHTM14611 onwards. Essentially, where IHT becomes due because the donor dies within 3-7 years of making a gift, the amount of IHT payable is tapered. Taper Relief will not apply to a GWROB in your client’s estate.


As your client will continue to occupy the property after gifting it to his son, he is deriving a benefit from the asset after gifting it away and will therefore be caught within the GWROB rules. This means the asset will be treated as forming a part of his estate on death, and the perceived benefit of removing the property from the estate will not be achieved.

In this situation, your client can only get the property out of his estate by paying a market value rent, either in money or money’s worth, FA 1986 Sch. 20 para 6(1)(a). This rent would have to be paid for the entirety of the ‘relevant period’, which is from the date of gift up until the donor’s death, see example in IHTM14335. If the rent stops being paid or becomes uncommercial at any point during the relevant period, then the gift will be a GWROB. The continued payment of a market rate rent is a major financial burden and should not be entertained lightly.

Assuming rent is paid:

If rent is paid for the whole of the relevant period, the property will be excluded property for the purposes of the GWROB rules. This means at the date of gift the donor is treated as making a potentially exempt transfer (PET). If he survives 7 years from the gift it will not form part of his estate on death.

If your client dies within 7 years from the date of the gift, the PET will fail and be brought back into his estate on death. The residential nil rate band (RNRB) of £175,000, or £350,000 if he has received his deceased wife’s, will not be available on his main residence. This is because IHTA 1984 s.8E(1)(a) tells us that the RNRB is only available against assets in the ‘estate immediately before the persons death’, and here the PET is only brought into the estate on death. Contrast this with a GWROB which will be treated as part of the estate and so will enable the RNRB to be claimed.

Taper relief will be available if the donor dies within 3-7 years after the gift, but as this relief is against the IHT payable on a gift, not the value of the gift itself, it may be less beneficial than previously thought. Presuming your client inherited his wife’s full transferable nil rate band (TNRB), he would have £650,000 of NRB available on death. This would be set first against the value of the PET, meaning the NRB may be used up before it can be set against the rest of his estate, and only the value of the PET in excess of the NRB would benefit from taper relief, see Example 1 IHTM14611.

Often the idea of paying rent for a property that a client has gifted on to their children is met with disapproval. Even if rent is paid, the estate may lose the benefit of the RNRB and miss out on the taper relief if the property is within their NRB. As always, advice is always recommended as the circumstances may vary in every situation.

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Apprentice Tax Advisor

Stephen started working for Croner Taxwise in 2020, helping out the Tax team as Advice Line Administrator. He is now an Apprentice Tax Advisor working towards his ATT qualification.

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