Most lifetime gifts are treated as potentially exempt transfers (PETs) for Inheritance Tax (IHT) purposes. In general, these gifts become fully exempt if the donor survives for seven years after making the transfer. If death occurs within seven years, the gift may become chargeable, with taper relief potentially reducing the tax rate depending on how long the donor survives after the gift.

However, different rules apply where the donor does not fully give up the benefit or “enjoyment” of the gifted asset. These are known as gifts with reservation of benefit (GWROB).

A GWROB arises where an individual transfers an asset but continues to benefit from it, meaning the gift is not an outright gift and is not usually exempt for IHT purposes. A common example is where a person gives their home to family members but continues to live there rent-free.

Where a reservation of benefit exists, the asset is generally still treated as part of the donor’s estate for IHT purposes, regardless of how long they survive after making the transfer. The value is typically assessed at market value at the date of death.

The rules can be avoided in some cases if the donor pays full market rent for continued use of the asset, thereby removing the retained benefit.

In contrast, where a genuine PET is made without reservation and the donor survives seven years, the gift falls outside the estate for IHT purposes and taper relief may apply if death occurs within the seven-year period.