IHT400 Notes : Guide to completing your Inheritance Tax account

IHT400 Notes
Gifts with reservation
of benefit
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Guide to completing your Inheritance Tax account
The deceased ceased to have a right to benefit from assets
The deceased may have been entitled to benefit from the assets held in a
trust or settlement, but during their lifetime that entitlement came to an
end. This may be in whole or in part.
Their entitlement to benefit from the asset may have come to an end
because of the terms of a trust or because the deceased asked the trustees
to alter or terminate their entitlement.
Gifts treated as exempt because they are gifts out of income
If you are claiming that gifts made by the deceased are exempt as gifts
made as part of normal expenditure out of income, please fill in the table
on page 6 of the schedule, as well as giving details of the gifts on page 2 of
the schedule.
More information about the 'Normal Expenditure Out of Income' Exemption
can be found at page 72 of this guide.
A gift with reservation is one where the recipient does not fully own it or
where the donor either reserves or takes some benefit from it.
Where this happens the law says that we can include the assets as part of
the deceased’s estate at death. This rule only applies to gifts made on or
after 18 March 1986 and there is no seven year limit as there is for
outright gifts.
The most common examples of gifts with reservation include:
• a parent (now deceased) gave their house to their son, but continued to
live there without paying rent.
• a parent put a building society account into their daughter's name but
the interest the money earned continued to be paid to the parent.
If the parent in the first example made an arrangement to pay rent at the
market rate, then the parent (the donor) would not have reserved benefit.
Details about the gift should be entered on page 2 of Schedule IHT403,
'Gifts made within the seven years before death', instead.
There may be times when a gift is originally given with reservation of
benefit and the reservation ceases at a later date. For example, a parent
gives their house to their son and continues to live there without paying
rent. Two years later the parent starts to pay rent at the market rate. This
means that the reservation has ceased.
Once the reservation has ceased, the gift becomes an outright gift.
We will consider the gift to have been made on the date the reservation
ceased. In this example this will be on the first date the rent (at market
rate) is paid.
When we calculate the tax due, the seven year period would begin on the
date the reservation ceased.
If the deceased died within the seven year period, do not enter details
here. Give details on page 2, 'Gifts made within the seven years before
death', instead and include the value of the property at the time the
reservation ceased.
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