What are the PETs and Gifts With Reservation of Benefit (GROB)?
A gift, often referred to as a potentially exempt transfer (PET), is a transfer of value, such as an outright gift to a person or a willing sale of property while the owner is still alive. For Inheritance Tax (IHT) reasons, the value represents the loss to that person’s estate. A controlling stake, for instance, may be worth more than a single share.
If PETs live seven years after the date of the gift, they will no longer be considered gifts and will be excluded from the inheritance of the donor (unless it is a Gifts With Reservation of Benefit).
What impact would an allegedly exempt transfer have on my estate?
The theoretically exempt transfer will become subject to IHT if the recipient does not live seven years after the transfer, using up the first portion of the recipient’s Nil Rate Band (NRB), which is a cap of £325,000 per person that is subject to IHT at 0%. Any PETs produced within seven years after death that are higher than the NRB may be subject to IHT at a 40% rate. Whether a Will exists and how it is worded will determine who is responsible for paying the IHT liability.
What does the Gifts With Reservation of Benefit rule mean?
A GROB is when the giver retains some of the advantages of the gift they are making. For instance, when a parent gives their home to their adult child who has moved out but continues to live there for free. In this case, the gift would be subject to IHT and treated as if it had remained in the person’s estate, but in all other respects, the property is legally owned by the child. As a result, if the property is sold for a profit but is not the child’s primary residence, the child would be responsible for paying capital gains tax.
How can the Gifts With Reservation of Benefit affect PET position?
If a present with a reservation of benefit expires within the recipient’s lifetime, it will be regarded as a pet beginning on the day the recipient ceases receiving the benefit of the gift and the seven-year clock begins to run.
The exemptions to the GROB regulations are:
if the giver distributes the advantages to the recipient. In the previous example, a parent owns their home and gives a child who lives with them half of it as a gift.
The transfer will not be regarded as a GROB if the recipient keeps the benefit but pays full market rent for the use.
The GROB laws do not apply if a person transfers ownership of their property to a relative, spouse, or civil partner, stops occupying it, then later moves back in as a result of unanticipated circumstances.
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