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When will a gift of cash be treated as a gift with reservation of benefit for inheritance tax purposes?

Background

It may come as a surprise to some that the gift of cash is subject to a unique set of taxation rules. Only in recent decades have HMRC introduced the concept of gifts subject to a reservation coming at the same time as the introduction of the seven-year rule for potentially exempt transfers.

What is a gift with reservation of benefit?

This term was defined and introduced into the taxation regime in the Finance Act of 1986. If an individual disposes of any property by way of a gift, it will be treated as a gift subject to a reservation if it meets one of the following two conditions.

Firstly, if the person who you give the gift to did not enjoy the use of the property at the beginning of the period of seven years before the death of the person giving the gift, it will be considered a gift with reservation of benefit.  For example, if I were to transfer the ownership of a sole bank account to joint names, and continued using the account as if it were my own, I would meet this condition.

The second condition is that during the seven-year period as explained at condition one, the person receiving the gift has not excluded, or virtually excluded, the person making the gift. For example, if I were to gift a holiday home to a family member and enjoyed each Easter break rent free at the property, I would be meeting this condition.

In short, this means that a gift with reservation of benefit is where an individual transfers ownership of an asset to another, but continue to benefit from the transfer.

How does this apply to gifts of money?

When there is a gift of money and the money itself becomes property subject to a reservation of benefit, there are a few scenarios in which the taxation rules for reservation of benefit apply.

It is possible for a gift of money to fall into the rules, for example if I were to gift £100,000 to an individual and retain access to the account this may fall foul of the rules. Similarly, if the gifted money is invested to earn interest and I receive the interest back, this may also constitute a gift with reservation of benefit.

Next Steps

Every person’s taxation situation is unique, please get in touch for a discussion about the above topic or taxation more generally. There are many ways that our Private Client team are able to support you in assessing inheritance tax liability and putting in place lifetime planning to minimise the tax burden on your family once you’re gone.

If you would like a chat to discuss further, please feel free to contact me for a free 30-minute consultation.

Sophie Campbell

01637 800 306

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