15 August 2019
GROB! Having your cake and eating it
By Miranda Marshall, Director, Hayes + Storr.
The Gift with Reservation of Benefit (GROB) rules within Inheritance Tax (IHT) legislation are there to prevent you having your cake and eating it. They came in with the Finance Act of 1986.
At its simplest, GROB is there to remove any IHT-planning benefit in giving away your home whilst continuing to live there, i.e. you can’t have your cake and eat it!
For sake of simplicity, I shall treat the parent as the giver (donor) and the child as the beneficiary (donee) in this article, even though that need not be the case.
The child needs to take possession of and enjoy the asset given to them and not just have it placed in their name. The parent must derive no more than a minimal benefit. Minimal is interpreted strictly. So, if a parent wishes to hand on their holiday house, they need to pay the going-rate for lettings; however, the child will have to pay all the outgoings, so it could be cost-neutral.
There is a useful, but in practice rarely applicable, exemption, which requires both the parent and child to occupy the same home as their main residence. The house, generally, needs to be held 50/50, following the gift from parent to child. The parent must not receive any benefit for the gifted share but they can split the bills in the same share of ownership. Indeed the child can pay more than their share of the bills, but not vice versa. The risk is that should the child move out, then the tax benefit stops, as though it never existed.
There is a more frequent arrangement, as a way of having your cake but requiring one to have to pay to eat it. This is a gift of the house (or share of it) by the parent, who then pays a full market rent for the remainder of the time they live there. A professional valuation to evidence the rent as being a full market one is advisable. It should be reviewed regularly (e.g. 3-yearly). An upside is that the rent also reduces the estate of the parent but the downside is that child will have to pay income tax on the rent. There are other complications which mean that this scheme may not suit all families. The rent is often too costly. BUT it works.
In all cases, the 7-year IHT rule applies so that, until 7 years has elapsed, the gift is a Potentially Exempt Transfer (PET). Taper Relief comes in after 3 years, but only helps where gifts are in excess of the £325,000 Nil Rate band. Always take professional advice to help you through the labyrinth.
Ever wondered why the size of estates of the famous or noble seem smaller than one might expect? This is because they carry out careful planning through such schemes and the use of trusts (onshore and offshore). You have to be a fat cat to have cream with your cake, and probably seven lives too.
This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.