ICAEW.com works better with JavaScript enabled.
Exclusive content
Access to our exclusive resources is for specific groups of students and members.
Q: My client is asking about IHT. His parents divorced in 2008. His mother gifted the family home equally to my client and his aunt. The gift was made in 2010 when the house was worth £100,000. However, his mother continued to live in the house rent free until she died in 2021 when the house was worth £200,000. Her only assets on death were cash of £300,000 which was left to my client. With the Nil Rate Band (NRB) for IHT being £325,000 he is not expecting to pay any IHT. However, my client has asked if the gift in 2010 will affect the IHT position on death.

A: The gift of the house in 2010 was made more than seven years before death so would normally be a potentially exempt transfer (PET). However, the gift of the house is not effective for IHT and the value of it at the date of death will be included in the mother’s estate for IHT. This is because the gift will be treated as a Gift With Reservation Of Benefit (GWROB). A reservation of benefit arises where either the donee does not have bona fide possession and enjoyment of the property or the gifted property is not enjoyed to the exclusion of the donor (s 102(1) FA 1986).

If certain conditions are fulfilled there can be an extension of the NRB by up to £175,000. The Residential Nil Rate Band (RNRB) can be given where a residence is inherited by lineal descendants. If, on death the house had been inherited by the son the nil rate band would have been extended by the lower of the value of the house which is £200,000; the maximum allowed of £175,000 or the value passing to lineal descendants. If he had inherited half the house on death the nil rate band extension would be £100,000 giving a total NRB of £425,000. So, £75,000 would be liable to IHT at 40% giving an IHT bill of £30,000.

The detailed IHT rules do allow a GWROB to be treated as inherited if a lineal descendant owns the residence on the death (s 8J(6)(b) IHTA 1984). This would allow the RNRB to be available but only up to the amount allocated to lineal descendants which in this case is £100,000.

A deed of variation can alter the disposition of assets on death. If the house had not been given away the beneficiaries could have agreed to a deed of variation to swap the share in the house for cash. That would have allowed the full £175,000 of relief to apply and taking the full NRB to £500,000 (the basic NRB of £325,000 and the RNRB of £175,000).

However, it is not possible to do a deed of variation for a GWROB. This is because the gift does not come from the estate and so cannot be amended. It is only in the estate by virtue of the deeming provisions which do not enable a deed of variation to be made in relation to a GWROB. Therefore the IHT bill of £30,000 cannot be avoided in this case.