By Probate Lawyer, Sian Davies
A gift with reservation of benefit (GROB) is where a person has made a gift during their lifetime but retained some use or benefit of the gift. This term applies to any gifts made on or after 18 March 1986. In this article, we consider the Inheritance Tax implications of a GROB, any exceptions to the rule and provide some helpful examples to show how they are dealt with in practice.
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The Effect of a GROB for Inheritance Tax Purposes
The most common example of a GROB is when someone gifts a property to their children (who reside elsewhere), but they continue to live in the property rent free until they die. This would be considered a GROB. This is because they haven't truly given their gift away absolutely, so the value of the property will form part of their Estate for Inheritance Tax purposes upon their death.
Example of a GROB
Suzy decides to transfer her property into the joint names of her and her Son Michael in 2006. Michael does not live in the property, however Suzy continues to live there rent free until her death in 2015.
Although Suzy gifted half of the property to Michael, as he did not live there he could not be considered to have had possession and enjoyment from the gift and so this would be considered a GROB. Upon Suzy's death the full value of the property would be included in the Inheritance Tax calculations of her Estate.
Potentially Exempt Transfer (PET)
If a gift was made and they retained the benefit for a period of time but then subsequently gave it away absolutely, it will be treated as if a 'Potentially Exempt Transfer' (PET) had been made on the date that the benefit ceased. For example, someone gifted their property and continued living in it for a time but then moved out and stopped benefitting from it. From this point it is not a GROB but will be seen as a true gift, i.e. a PET, and the '7 year rule' applies.
If someone dies within 7 years of making the PET, the value of the gift will form part of their Estate for Inheritance tax Purposes. Conversely, if they survive for 7 years from the date of the PET, it would be exempt from Inheritance Tax and would not need to be included as part of their Estate.
Example of a Potentially Exempt Transfer (PET)
Arthur decides to gift the whole of his property to his son Jake in 2010, but Arthur continues living in the property until he goes into care in 2014. Arthur then passes away in 2018.
When his Executors are dealing with his Estate, they must declare the gift of Arthur's property to his son as a PET, as Arthur moved out of the property within 7 years of his death.
The key date here is the date that Arthur left the property and moved into care, as this was the date that his benefit in the property ceased.
Exceptions to the Rule
There are, however, a number of exceptions to the rule. If you are dealing with an Estate and you are unsure whether it contains a GROB, we would always recommend that you obtain legal advice from a Probate Specialist.
One exception to the rule would be if someone gifts a property to their child and continues to live there, however they pay their child rent at the market rate. This would not be considered a GROB, because they cannot be said to still be benefitting from the gift.
GROBs and Care Home fees
We often see examples during Probate of a GROB being used to try to prevent a property being considered as an asset by the Local Authority for care fees. However this may be unsuccessful and Local Authorities do have the power to recover care fees, should they feel that assets have been gifted for the purposes of avoiding paying these.
After someone dies, the Executor or Administrator of their Estate is responsible for identifying PETs or GROBs and including these in Inheritance Tax calculations where applicable. If you are in this position and are unsure of the process, it's important to contact a Probate Specialist to seek professional guidance.
To speak with a Co-op Probate Advisor call 03306069584 or contact us online and we will call you.
Also, if this is something that you are concerned about with regards to your own Estate, there are ways that assets can be protected though various provisions when you make a Will. Our Will Writers can provide advice on this and talk you through the various options available.