For the many parents who have gifted their properties to their children as an early inheritance, many won’t realise that by then staying with their children during the coronavirus pandemic, they risk having to pay the very Inheritance Tax they were hoping to avoid by making the gift in the first place.

“Most people who gift their properties to their children during their lifetime do so in the hope that they will survive the gift by 7 years, meaning that the property won’t form part of their estate for calculating any Inheritance Tax due” says James Urquhart-Burton, Partner at Ridley & Hall Solicitors and specialist in wills and inheritance disputes. “as Inheritance Tax is currently charged at 40%, surviving the gift by 7 years can bring huge financial benefit, but it is of course a gamble as you need to outlive the gift by some margin.”

Little do people know however, that not only do you have to survive 7 years, but you also have to ensure that you do not seek to gain any benefit from the property you have gifted. In law this is called a “gift with reservation of benefit” and if you retain any benefit relating to the property you have gifted, then there is a real chance that HMRC will still regard the property as being part of your estate and Inheritance Tax may be payable on it.

This is likely to be an increasing problem for people during the pandemic and the very thing which these individuals will have been hoping to avoid. The risk arises from the fact that a clear example of reserving benefit of a gift of property, is that the parent continues to reside in the property.

So, elderly parents who previously gifted property to their children, may have chosen to move into the property with their children over lockdown, which could mean that Inheritance Tax will rear its ugly head on the parent’s death.

There are some exceptions which mean that the property won’t be taken into account for Inheritance Tax, such as if it can be shown that the elderly parent had no choice but to move back into the property, for example, due to illness. Another example might be where children have been paying their parent market rent to occupy the property, but this seems unlikely to be the case for most families.

What can be done? Well, it is important that when the time comes to administer the estate, expert advice is sought by the executors so that an assessment can be made as to the circumstances regarding the gift and the extent of enjoyment of the gift by the parent. This will ensure that the right amount of tax is paid and any concerns or disputes which may arise from the beneficiaries of the estate can either be addressed or avoided altogether.

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James Urquhart-Burton – Partner & Solicitor