Gifts with a Reservation of Benefit

Creating a Gift with a Reservation of Benefit:

When you’re thinking about creating a gift with a reservation of benefit, it’s like entering a complex legal labyrinth. You need to be aware of various legal intricacies. Let’s break it down together.

Understanding the Types of Gifts

Imagine you’re at a crossroads: one path leads to revocable gifts, and the other to irrevocable ones.

• Revocable gifts are like a safety net; you can change your mind at any time.
• Irrevocable gifts, on the other hand, are a firm commitment; once you decide, there’s no turning back.

Considering Tax Implications

Here’s where it gets tricky.

Some gifts with reservations might attract inheritance tax. It’s like a hidden trap on your journey. But don’t worry; with the right advice, you can find ways to minimise, or circumvent this tax pitfall.

Just to be clear, by circumventing, I do not imply that you should engage in tax evasion.

After our initial planning, we had trouble getting in touch with a very nice, wealthy family who visited us because the parents were frequently away at their villa in Malaga. We asked the adult children why this was not shown on the list of assets, as it was worth 750,000 euros.

That’s easy to explain; they said we bought it from them.  At our next meeting with the parents and adult children present, I asked to see a statement from their bank accounts showing that each child had paid £250,000 euros.

No, you don’t understand what we said. We saw a local obrigado (notary) and they completed a bill of sale, and our purchase went ahead by signing a deed allowing the parents to stay at the villa as many times as they liked for free in exchange for us being named as owners.

They also stated that their obrigado said this was legal in Spain. I confirmed it was not legal under UK inheritance tax rules.

A classic gift with a reservation of benefit

Just to remind everyone, the difference between tax avoidance and tax evasion is the thickness of a prison wall!

What exactly is a gift with a reservation of benefit (GROB)?

Picture this: you hand over a precious gift but keep a tiny string attached to it. That’s essentially what a GROB is. In the UK, this concept ensures that taxpayers can’t double-dip, enjoying a tax-free transfer and continuing to benefit from the “enjoyment” of the property.

There are mainly two types of GROBs.

• The first one is like giving a gift but setting a condition—say, you give a property to your child, but they can’t sell it for 10 years.
• The second type allows you to still enjoy some perks from the gift, like living in a property you’ve handed over to your child.

Valid reasons to go down this path.

Why choose this route? First off, it’s a great way to control your estate taxes. It’s like having your cake and eating it too—you transfer ownership but still enjoy some benefits, keeping the taxman at bay.

Another reason could be to shield your property from creditors. It’s like a protective shield, keeping your gift safe in turbulent times. Also, it’s a smart move to ensure your property stays in the family and passes down through generations.

And finally, it can be a strategic move to encourage someone to care for the property.

Navigating Restrictions

Just like any road with its speed limits, gifting with a GROB has its restrictions. These rules are there to ensure that the gift genuinely benefits the intended recipient and is not just a clever way to benefit yourself or your close family members.

Different Flavours of Reservation of a Benefit

The reservation of benefits has a variety of flavours. Income reservation is like keeping a slice of the pie; you still get a taste of the property’s income. Then there’s reserving the use of the property—imagine giving away your beach house but keeping it for a couple of weeks for your vacation. And there are other creative ways you can reserve benefits, tailored to your specific situation.

Dealing with Taxation

The taxation of gifts with reservations can be a thorn in your side. If not your spouse or civil partner, the recipient might face inheritance tax on the gift. It’s like an unwanted guest at a party. And if you pass away within seven years of the gift, it might come back to haunt your relatives when the tax bill arrives.

Making it Official

Creating an executable GROB is like crafting a masterpiece. You need to get the blueprint right, which means drafting a solid gift agreement with legal help. Once everything is signed and sealed, you can transfer the assets, and the recipient becomes the new steward of your gift.

Managing the Risks

Think of risk management as your GPS through this journey. It’s all about avoiding potential pitfalls, like ensuring the gift is used as intended and choosing a reliable recipient. It’s crucial to have clear terms and consult with legal and financial advisors to navigate these waters safely.

Keeping Records

Record-keeping in this process is non-negotiable.

Think of it as keeping a travel diary; it helps you to keep track

• the journey of your gift,
• its value, and
• its impact on your taxes.

Whether it’s a simple spreadsheet or specialised software, keeping track is key.

Seeking Professional Advice

Before you embark on this journey, it’s wise to consult a professional. They will help you understand the implications and tailor a plan that fits your unique situation. It’s like having a seasoned guide for an adventurous trek.

There are two legal cases concerning gifts with a reservation of benefit.

Let’s consider the results of two legal cases:

Chick v Commissioner of Stamp Duties

Munro & Ors. v Commissioner of Stamp Duties

Chick v Commissioner of Stamp Duties (1958)

Imagine a father who owns a farm and decides to give it to his son. Sounds straightforward, right? But here’s where it gets interesting. About 17 months later, the father and his son start a partnership business using, among other things, the farm he just gave away. The father is calling the shots in this business and effectively still running the show on the farm.

Fast forward to when the father passes away. The question arises: should the farm be included in his estate for death duty purposes? The authorities thought so, and the Privy Council agreed. They said that since the father continued to enjoy the benefits of the farm through the partnership, it wasn’t entirely excluded from his estate. This case tells us that if you give something away but still want to keep a hold on it, especially through business arrangements, it might still be considered part of your estate.

Munro & Ors. v Commissioner of Stamp Duties (1934)

Now, let’s look at the Munro case, which presents a different scenario. Here, a farmer involves his children in a partnership for his farming business. A few years later, he gives each child a portion of the land, but this gift comes with a twist. It’s subject to the partnership agreement, meaning they could work the land independently if they wanted to, but later, this understanding was revoked.

When the farmer dies, the question is whether these portions of land should be included in his estate for death duty. The decision was no; they shouldn’t. Why? Because the gifts were essentially the land minus the rights of the partnership, the court saw any remaining benefit the farmer had as related to the partnership agreement, not the gifts themselves.

Key Takeaways

So, what do these cases tell us about GROBs?

1. Chick Case: If you give something away but continue to benefit from it, like through a business, it might still count as part of your estate. It’s like saying, “Here, have this gift, but I’ll still use it.”
2. Munro Case: If you give away an interest in property but retain a separate interest (like in a partnership), the gift might not count as part of your estate. It’s more like, “I’m giving you this, but under these specific conditions that I won’t benefit from.”

These cases are important because they help clarify the often murky waters of estate planning and taxation. They show that the specifics of how and under what conditions you give a gift really matter when determining if it’s a true gift or something you’re still holding on to for benefits.

Conclusion: The Art of Gifting Wisely

Creating a will and including a GROB clause isn’t just a legal exercise; it’s an act of love and foresight. It’s about making sure your legacy lives on in the way you envision it.

Please remember that with tax planning, the devil is in the details, and attempts to carry out your own planning may well end in disaster.

Ensure you take advice from an experienced financial planner. Planning of this nature is not a one-off.  It is normally carried out over several years, so anticipate paying substantial fees over time, but any fees charged will work out a lot less than deductions of inheritance tax from your estate.

Remember, estate planning is not just about preparing for the end; it’s about shaping the future.

Take time to:

• carry out some research, such as reading my book “Inheritance Tax Simplified”,
• seek advice,
• avoid attempting to take shortcuts, and
• Make your decisions count.

If you would like to hear more, do get in touch.