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A gift with reservation of benefit is one of the most common IHT planning mistakes. If you give away an asset but continue to benefit from it, HMRC treats it as still being in your estate — the gift is nullified for IHT purposes. This guide sets out what the statutory rule says, the exclusions written into it, and how a reservation comes to an end.
The related anti-avoidance charge is covered in our separate guide to the pre-owned asset charge (POAC). For the broader context of gifting strategies see gifting strategy 2025/26.
The gift with reservation rules are in section 102 of the Finance Act 1986, not in the Inheritance Tax Act itself, though they take effect for the purposes of that Act. They apply where:
Where both conditions are met, the property is treated as forming part of the donor's estate immediately before death — regardless of how long ago the gift was made. The 7-year rule does not apply; a gift made 20 years ago is still in the estate if the donor continued to benefit.
The most common GWR situation is where a parent transfers their home to their children (to remove it from the estate) but continues to live in the property rent-free. This fails completely as an IHT planning strategy:
This is a trap that catches many people who have received well-meaning but incorrect advice. The arrangement feels like it has removed the home from the estate — but HMRC sees straight through it.
If the donor pays a full market rent to the recipient (now the owner), the reservation is cured. The donor is paying for the benefit — they are not obtaining it for free. The rent must be genuinely at market rate, kept up to date as market rents change, and actually paid (not just agreed on paper).
This is written into the Act rather than being a concession: Schedule 20 paragraph 6(1) provides that the donor's occupation of gifted land "shall be disregarded if it is for full consideration in money or money's worth".
It has consequences of its own: the recipient is now a landlord with taxable rental income, and there may be CGT implications when the property is eventually sold.
If the donor moves out and genuinely ceases to benefit from the property, the reservation is released. From the date the benefit ceases, the property is treated as a potentially exempt transfer made on that date — and the 7-year clock starts running.
Moving to a care home, to a different address (paying full market rent elsewhere), or genuinely not visiting or using the property — all can constitute ceasing to benefit. But HMRC looks at the substance, not just the form.
Where the reservation ends within seven years of death, the deemed PET can fail at the same time as the property is treated as being in the estate. The Inheritance Tax (Double Charges Relief) Regulations 1987 exist to stop the same value being taxed twice in that situation, by calculating the tax both ways and charging the higher figure only.
Section 102B of the Finance Act 1986 deals with a gift of an undivided share of an interest in land. Such a gift is not a gift with reservation where the donor does not occupy the land, or occupies it to the donee's exclusion for full consideration — and also where "the donor and the donee occupy the land" and the donor "does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift". This is the route by which a parent can give a share of a home to a child who lives there with them.
Schedule 20 paragraph 6(1) also disregards occupation that results from a change in the donor's circumstances which "was unforeseen at the time and was not brought about by the donor to receive the benefit of this provision", where the donor "has become unable to maintain himself through old age, infirmity or otherwise", the donee is a relative of the donor or of their spouse or civil partner, and the occupation "represents a reasonable provision by the donee for the care and maintenance of the donor". All four limbs have to be met.
The GWR rules apply to any asset where a benefit is retained — not just property:
Where a property is given away and the former owner later moves back in — even temporarily — the reservation can revive, unless the change of circumstances provision above applies. An extended stay with the children who now own the property is the situation in which the question most often arises.
Occasional visits, staying as a guest, or using a spare room occasionally are generally not treated as a reservation — but this is a matter of degree and HMRC's view on specific facts.
Where a GWR applies to the family home, the property is included in the estate on death. This means it can potentially qualify for the residence nil-rate band (RNRB) — and section 8J(6) of the Inheritance Tax Act 1984 deals with exactly this case. Where property is in the estate because of section 102(3), it is the person to whom the gift was originally made who is treated as having inherited it, at the time the gift was made rather than on death. So the RNRB can apply where that person is a lineal descendant, and cannot where they are not.
HMRC scrutinises home-gifting arrangements carefully. When reviewing IHT400 submissions, they routinely ask:
Executors must answer honestly, and incorrect disclosure can result in HMRC investigating further and potentially charging interest and penalties on underpaid IHT.
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