HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: introduction to gifts with reservation of benefit

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

Why the gift with reservation (GWR) rules are necessary

Most lifetime gifts to non-exempt beneficiaries are Potentially Exempt Transfers (PETs) (IHTM04057) and so become chargeable only if the transferor dies within seven years of the transfer. If the transferor survives the transfer by seven years, the PET becomes an exempt transfer.

This result was considered unsatisfactory on policy grounds if the transferor continued to receive a benefit from the gifted property (IHTM04030) - for example where the transferor gives their residence to their children but continues to live in it for at least seven years until their death. In the absence of special provisions to the contrary, in that example the house would not be taxable on the transferor’s death

  • as part of the death estate even though for practical purposes the transferor had continued to treat the property as their own until their death, or
  • as a PET if the transferor survived the gift for seven years.

Accordingly special rules were necessary to protect the Inheritance Tax (IHT) death charge. They are designed to stop taxpayers decreasing the value of their IHT estates by making gifts while effectively leaving their basic situation unchanged. A gift with reservation is one

  • made by the deceased,
  • of property subject to a reservation 
  • which was made on or after 18 March 1986
  • which was not an exempt transfer. (IHTM04026)

What the GWR rules do

The function of the special rules is to ensure that tax is charged

  • if on the transferor’s death there is property subject to a reservation (as in the above example), that property is treated as part of the death estate (IHTM14303), or
  • if within seven years before the death of the transferor the property ceased to be subject to a reservation, the transferor is treated as having made a PET (IHTM04064) at that time.

The rules are supplemented by regulations to cover the possibility of a double tax charge (IHTM04072) if the gift is also a chargeable transfer.