Gifts and Inheritance Tax
November 2006 Newsletter
Most taxpayers are aware of the term PET as applied to inheritance tax. (A Potentially Exempt Transfer.) If a gift is made from one individual to another as long as the person making the gift lives 7 years after making the gift, no inheritance tax is payable.
But what happens if the person making the gift retains some "enjoyment" of the gift made? We will need to consider the Gifts With Reservation of Benefits rules - otherwise known as "GWROB's".
When a person dies who has made a GWROB the value of the asset gifted will still form part of their estate for inheritance tax purposes. A classic example is where an elderly parent gifts their property to the children, but continues to live there. A GWROB can be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted.
A PET can also be affected by further anti-avoidance legislation called POAT - "Pre Owned Assets Tax". Although the underlying legislation was enacted to counter complex avoidance strategies, the Pre Owned Assets Tax can also be applied to quite innocent situations. It generally applies to gifts that are converted to other assets which are subsequently used by the original donor - POAT can also be applied to transactions that were set up some time ago! For instance an elderly parent could gift cash to son who buys a house in his name. The parent then occupies the house rent free. A POAT is not an inheritance tax charge - it is a charge to income tax for the use of an asset.
The legislation for both GWROB's and POAT's are incredibly complex. However a gift can only be classified as a GWROB or subject to the POAT rules - not both.
We suggest that if you have unwittingly stepped into a GWROB or POAT type transaction that you call us to discuss the tax consequences without delay!
