One of the important areas due to come up in the Advanced Tax and BPT exams is Gifts With Reservation of Benefit. (GWROB)

The most common example is when a grandparent or a parent gifts a property away to a descendant but still continues to use the asset.

Now, the grandson is the legal owner, but the grandmother is still benefiting from the use of the asset so becomes the beneficial owner.

For inheritance tax purposes, the gift is a potentially exempt transfer and will be taxed at 40% only if the donor dies within 7 years.

However, the value of the asset is frozen at the date of the gift and taper relief will reduce the tax as long as the grandmother survives for at least 3 years after the gift.

However, as the grandmother is still benefiting from the use of the property, the property is included in the death estate based on the higher market value at death.

It is important to note that when dealing with the death estate, as the property has passed to a lineal descendant, the residence nil rate band of £175,000 is available.

Should the grandmother pass away within 7 years, this means that the same asset is taxed twice: -once as a failed PET and secondly in the death estate.

HMRC offer double charges relief and the grandson would have to pay the higher of lifetime tax based on the failed PET and tax based on the death estate.

If the grandmother pays full market rent for the use of the property, then it would not be treated as a GWROB. In addition, the grandmother can occupy the property for a period of not more than 30 days in the tax year (while house-sitting) or in assisting with child-care.

In addition, if the grandmother becomes infirm in the future and is forced to reoccupy the property due to being unable to live independently, this will not be treated as a GWROB as long as it was not premeditated at the time of the gift.  

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