If an individual gives away their home but continues to occupy it until they die, the gift with reservation (GWR) rules apply and the gift remains part of their estate for IHT purposes. The GWR rules apply unless they are excluded from benefitting from the asset.
Full Consideration paid
The GWR rules will not apply if the donor pays ‘full consideration’ i.e. a market rent for living in their home. However, this means the rent is taxable in the hands of the donee. The advantages of this arrangement are:
If another individual shares the donor’s residence, it is possible to gift a share of the residence to that person. The GWR rules would not apply provided the property is also the donee’s home.
Sale to spouse
It is still theoretically possible for one spouse to sell their share of the property to the other in exchange for an IOU. This debt is then gifted to the children as a PET. After seven years, the value of their share of the house is out of the individual’s estate for IHT. This arrangement is possible as a sale for full market value is not a gift and it also involves a transfer to the spouse which is exempt. However this method may involve an SDLT charge depending on the value of the property. This is an aggressive strategy that is highly likely to be challenged by HMRC from a number of technical angles and is only appropriate for the client who is willing to take a punt!
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