Gift Without Reservation and Potentially Exempt Transfer - tax and financial advice from independent financial adviser (IFA) Isis Financial Planners

Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for February 2010. To browse the articles from a previous year, please visit the main Property and Tax page of this website.

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• Gift Without Reservation and Potentially Exempt Transfer (PET) - 12 February 2010
  
My wife and I are tenants in common of a house valued at £700,000. We want to hand it over to our daughter and son-in-law while continuing to live there. However, the gift with reservation of benefit would entail paying them rent of £20,000 a year, which we cannot afford. Equally, they would like to live with us but the resultant inheritance tax bill might force them to sell when we die. Is there a way we can reduce the costs by creating a self-contained annex for ourselves (it would have to be part of the building to avoid problems with covenants)? We can reasonably expect one of us to survive for seven years from the gift.

Maggie Fleming writes:

There is a much easier way to reduce your inheritance tax liability and remain living in your home without falling foul of either the reservation of benefit rules or the pre-owned assets tax. As your daughter and son-in-law are happy to move in with you, you can take advantage of a little known exemption from the reservation of benefit rules.

You and your wife would each gift an undivided share of the house to your daughter and her husband, and they would live there with you. This would be treated as a gift without reservation provided that you and your wife do not receive any benefit. So be careful that they do not pay more than their share of household expenses or fund alterations to the property. Indeed, to be on the safe side, it may be better if you and your wife pick up the bulk of the bills.

Like any other gift to an individual, this is a Potentially Exempt Transfer (PET) and will fall out of your estates provided you both survive for seven years. HM Revenue & Customs is generally happy where up to 50 per cent of the property is gifted in this way but may question a larger proportion. Most Inheritance Tax specialists believe HMRC to be wrong on this point and that giving a larger proportion to the children (say 90 per cent) will work. But the gift of even a half share would reduce your estates by £350,000. 

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