Imagine if Santa gave you a toy but told you it was still his to play with. You probably would not consider that a gift. Neither would the taxman, he would say it is a “gift with reservation”. In the grown-up world this occurs when people attempt to avoid inheritance tax by giving something away but still having use of it. The most common example I’ve come across over the years is when people have given their home to their children but are still living in it themselves in the mistaken belief it will avoid inheritance tax. In reality, the taxman says because you are still living in the property it is not a real gift and therefore doesn’t count. In such circumstances the “gift” is added back into the estate.
Very often, these people wouldn’t have had an inheritance tax problem anyway; the residential nil rate band that is being phased in means that structured correctly, from 2020 a married couple can give away £1 million on second death before any inheritance tax is due.
As well as failing to avoid a non-existent inheritance tax bill, they have often created their children a capital gains tax (CGT) bill for when the property is eventually sold, that wouldn’t have existed if they had simply left it to them in their will. This is because only your primary residence is exempt from CGT, not additional properties that you own. Therefore, the gain between the date it was gifted it to them and when they come to sell it is taxed at up to 28%.
Worse still, they are still deemed to own a property for stamp duty purposes. This means they are not a first-time buyer and so don’t benefit from the stamp duty exemption and if they purchase a property they are likely to be liable to the 3% stamp duty surcharge. The two combined can cost up to £20,000 in extra stamp duty!
If you’re thinking of making a gift and want to avoid any nasty tax surprises, you should really take regulated financial advice or at the very least as ask yourself, “what would Santa do?”