Family must pay andpound;176k inheritance tax bill due to common gifting error - how you can avoid it

Giving gifts can reduce inheritance tax liabilities, but it's important to avoid falling foul of the rulesA family has been ordered to pay 176,000 in inheritance tax by the court after wrongly interpreting gifting rules, which they thought would mean they avoided a bill after their father diedThe recent case successfully brought by HMRC involved the estate of Mohammed Chugtai who had given away one of his properties and placed it in a trust, in a bid to try to lower the inheritance tax (IHT) payable by his familyAfter gifting the property, he was required to return to live there with one of his daughters due to her deteriorating mental health, which meant she could not leave the propertyThis violated the inheritance tax regulations pertaining to gifts with reservation of benefit (GROB)

GROB rule errors are a "growing problem" for families, according to Claire-Louise Smith, a chartered legal executive at Pearson Hards solicitors.

"Grants of reservation of benefit when the individual has died and we are directed to get a grant of probate to administer the estate are causing us problems right now," she told BFIA.

Even though the deceased may have believed that their actions would result in a lower inheritance tax liability upon their passing, this isn't always the case.

Smith claimed that after explaining the circumstances to the deceased's children, they are forced to pay taxes they did not anticipate having to.

"This is undoubtedly a growing issue as more information is available on social media, but it may not be unique to each person's circumstances," she stated.

What is a benefit-reserved gift?

Giving an asset, such as a property, but keeping some benefits from it, like living there rent-free, is known as a gift with reservation of benefit, or GROB.

Because of this retention of benefit, the gifted asset is still regarded as a part of the donor's estate for the purposes of IHT even after the gift has been made.

For instance, the following could cause GROB rules to activate.

You give your children your house, but you continue to live there without paying the entire rent. You give a vacation home as a gift, but you continue to use it frequently for nothing. Valuable items, such as artwork or antiques, are transferred but remain in your house. "This catches out a lot of families who aim to preserve a person's assets by transferring them into the name of family members and avoiding inheritance tax rules," Smith said.

"The property will be considered a GROB if the occupant plans to stay there, and regrettably, IHT is still due.

After Chugtai gifted the property, the court decided that he had profited from it. Consequently, it consented to HMRC that, for inheritance tax purposes, it should be included in his estate.

During the court hearing, the family attempted to argue that the trust's value shouldn't be included in the IHT calculations because the gifting decisions were made more than seven years prior to their father's passing.

Gifts that are given seven years prior to a person's death are typically not subject to IHT.

The family also claimed that because of his daughter's poor health, Chugtai was forced to return to the property.

Nonetheless, HMRC was successful in arguing that since he had profited from the property, it should be included and IHT was due.

GROB rules: how to stay within them.

Smith stated that you can take the following actions to ensure the gift is successful and prevent a GROB.

Stop using it and reaping its benefits, and give it away completely. Like any other tenant, you must pay the new owner the full market rent if you intend to continue using it. Before making large gifts, heed advice because seemingly straightforward decisions may have unanticipated tax repercussions. Smith suggested consulting a lawyer or tax advisor to determine whether the GROB regulations apply to you if you believe you have violated them.

You might be able to start paying rent now if you're still using something you received as a gift. This will help mitigate future issues because it's better to take care of things now rather than leaving surprises for your family later.

According to Smith: "Gifting assets can be a wonderful way to support your family and lower inheritance taxes, but it's easy to do it incorrectly.

"The GROB regulations are complicated, but you can avoid the pitfalls with the correct preparation and guidance.