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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Lifetime transfers: the charging provisions for gifts with reservation of benefit

Reservation at the transferor’s death

If the property (IHTM04030) gifted is subject to a reservation when the transferor dies, it is deemed to be property to which they were beneficially entitled (IHTM04031) immediately before their death (except to the extent that the property forms part of their estate anyway), FA86/S102 (3). So, the property is part of the transferor’s estate, (IHTM04029) unless it is excluded property, (IHTM04251) and has to be valued at the date of death.

Reservation ceasing in the transferor’s lifetime

If the reservation ceases during the transferor’s lifetime, the transferor is treated as making a potentially Exempt Transfer (PET) (IHTM04057) of the gifted property, on the date the reservation ceased., FA86/S102 (4). This is a deemed PET (IHTM04064) and comes into charge on the transferor’s death in the same way as any other PET made within that period. Because of the definition of a gift with reservation (GWR), (IHTM14301), the reservation must have existed within the seven year charging period for PETs.

Because FA86/S102 (4) creates a deemed PET (there being no actual transfer of value when the reservation ends) the annual exemption (IHTM14141) is not available against it.

Termination of interest in possession in settled property

For certain interests in possession in settled property that come to an end in an individual’s lifetime and on or after 22 March 2006, FA86/S102ZA allows the owner of the IIP to be treated as making a gift of the underlying property for the purposes of FA86/S102 and Sch20. S102ZA applies to interests in possession to which either an individual became entitled before 22 March 2006 or to interests in possession that are an immediate post-death interest, a disabled person’s interest or a transitional serial interest (IHTM16061).

Double charges

If the original gift of the property was itself a chargeable transfer (IHTM04067) when made or was a PET and the transferor dies within seven years, a charge as both a lifetime transfer and a GWR will arise. To prevent a double charge to tax, relief under the Double Charges Regulations (IHTM14711) may be available.


Mahinder gives her house to her son, Kamal but continues to live there until she dies, 3 years later. The gift itself is a PET that is chargeable following the death and Mahinder has continued to benefit from the property given away. A charge arises as both a PET and a GWR. The double charges regulations will apply and allow one of the charges to stand whilst reducing the other to nil.

Pre-owned assets and GWRs

Schedule 15 Finance Act 2004 introduced an income tax charge on pre-owned assets (POA). It was intended to stop people avoiding IHT on valuable assets like the family home while continuing to benefit from using them. It achieved this by imposing an annual income tax charge on the benefit of using the asset(s).

As an alternative to the POA income tax charge, people can elect instead that the property will be treated for IHT purposes as if it were subject to a reservation. If they do this the value of the property will form part of the former owner’s taxable estate if they continue to enjoy it up to their death, or if they cease to do so within the seven years before they die.

Detailed guidance about POA can be found on the HMRC websitehere