A complicated gift

Emma Chamberlain considers the common problems caused by reservation of benefit, and a change of approach by HMRC

Under Finance Act 1986 s 102, when there is a reservation of benefit in gifted property at the date of death, for inheritance tax purposes that property is treated by sub-section (3) as property to which the donor was beneficially entitled at his death. This means it is taxable under Inheritance Tax Act (IHTA) 1984 s 4. Where the reservation ceases at any time during the donor’s life, he is treated by sub-section 102(4) as making a potentially exempt transfer at that time. Like an ordinary potentially exempt transfer, the deemed one under sub-section (4) becomes chargeable only on the donor’s death within seven years of the reservation of benefit ceasing. Hence under both sections, it is not until the donor’s death that any tax can become payable under the gift of reservation rules.