Inheritance tax (IHT) was introduced almost 20 years ago and broadly charges to tax certain lifetime gifts of capital and estates on death.
With IHT came the concept of ‘potentially exempt transfers’ (PETs): make a lifetime gift of capital and, so long as you live for seven years from making the gift, there can be no possible IHT charge on it whatever the value of the gift. The rules create uncertainty until the seven year period has elapsed but, at the same time, opportunity to pass significant capital value down the generations without an IHT charge. Of course this is to over simplify the position and potentially ignore a whole host of other factors, both tax and non-tax, that may be relevant.
However many people are simply not in a position to make significant lifetime gifts of capital. There are a number of reasons for this the most obvious being that their capital is tied up in assets such as the family home and business interests and/or it produces income they need to live on.
But what is to stop a gift of the family home being made to, say, your (adult) children whilst you continue to live in it? The answer is simple: nothing! However such a course of action is unattractive not to say foolhardy for a number of reasons the most significant being:
The reason such a gift doesn’t work for IHT is because the ‘gift with reservation’ (GWR) rules deem the property to continue to form part of your estate because you continue to derive benefit from it by virtue of living there.
However this is not the end of the story…….