Syllabus A3. Inheritance Tax A3b. The scope of IHT

A3biv. Gifts with reservation

Syllabus A3biv)

Identify and advise on gifts with reservation of benefit

What is a gift with reservation?

Gifts with reservation

A gift with reservation is a lifetime gift where:

  • The legal ownership of an asset is transferred but

  • The donor retains some benefit in the asset gifted

    For example, a donor gifting a house but continues to live in it or the gift of shares but the donor retaining the rights to future dividends.

Why would the donor make the gift if they still want to use the asset?

Gifting appreciating assets during lifetime is beneficial because the value of the gift will be frozen at the date of gift, therefore if the value increases when the donor dies, tax will only be paid on the value at the time of gift.

Gift with reservation rules

HMRC has introduced special anti-avoidance rules for a GWR to ensure that they do not escape the correct IHT payment.

For a GWR, HMRC will choose the value of the asset to use for taxation at the time of death. If the value of the asset is higher at the time of death, then they will use the market value at the time of death.

Exception to GWR rules

If the donor pays market value for the benefit of still using the asset, then the GWR rules will be lifted and it will be treated as a normal lifetime gift.

For example, if a donor gifts a house and continues to use it, but pays full market rent to the donee while living in the house, then he has paid for the benefit fully and this will not fall under the GWR rules.


Priya gave her house to her son Sushil on 01/04/2013 when it was worth £360,000. She had made no previous lifetime gifts.

She continued to live in the house and paid no rent to Sushil. 

She died on 01/01/2019 when the house was valued £475,000. 

How much IHT will be payable on this gift?


Treating it as a lifetime transfer

01/04/2013 PET £360,000
12/13 Annual Exemption (£3,000)
11/12 Annual Exemption (£3,000)
Gross chargeable amount £354,000

NRB 18/19 (£325,000)

Taxable amount £29,000

IHT 40%* £29,000 = £11,600

Taper relief (5-6 years 60% * £11,600) = (£6,960) (see topic Taper Relief)

IHT payable £4,640

  • Treating it as a death gift

    Market value at death £475,000
    Less RNRB and NRB (£125,000+ £325,000)
    Taxable amount £25,000
    IHT 40% * £25,000 = £10,000
    The higher amount of £10,000 will be payable and it will be treated as part of the death estate.

    Note: the RNRB is not available against life gifts. It is only available in the death estate,