Learning Outcomes
After reading this article, you will be able to explain how anti-avoidance provisions apply to inheritance tax on lifetime transfers and transfers on death. You will be able to identify and apply the rules on gifts with reservation of benefit, associated operations, and pre-owned assets tax, and understand how these provisions affect the calculation of IHT and the effectiveness of estate planning strategies for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the anti-avoidance rules that apply to inheritance tax on both lifetime transfers and transfers on death. In your revision, focus on:
- the operation and effect of the gifts with reservation of benefit (GROB) rules
- the concept of associated operations and how HMRC may treat connected transactions
- the pre-owned assets tax (POAT) regime and its relationship to IHT
- how anti-avoidance provisions impact the effectiveness of common IHT planning strategies
- the interaction between these rules and the calculation of IHT on death and during lifetime
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is a gift with reservation of benefit and how does it affect the donor’s estate for IHT purposes?
- Which anti-avoidance provision allows HMRC to treat a series of related transactions as a single transfer for IHT?
- What is the pre-owned assets tax (POAT) and when might it apply?
- True or false? If a donor gives away their house but continues to live in it rent-free, the house is excluded from their estate for IHT.
Introduction
Inheritance tax (IHT) is charged on transfers of value made during a person’s lifetime and on death. The law contains a range of anti-avoidance provisions to prevent individuals from reducing their IHT liability by giving away assets while continuing to benefit from them, or by using complex arrangements to avoid tax. For SQE1, you must be able to identify and apply the main anti-avoidance rules, especially gifts with reservation of benefit, associated operations, and the pre-owned assets tax.
Gifts with Reservation of Benefit (GROB)
A common IHT planning strategy is to make gifts during lifetime so that the value of the gift is removed from the donor’s estate, provided the donor survives seven years. However, the law prevents this from working if the donor continues to benefit from the asset.
Key Term: gift with reservation of benefit (GROB) A gift made by an individual who retains some benefit or enjoyment from the property given away. For IHT, the asset is treated as remaining in the donor’s estate.
If a person gives away an asset but continues to use or enjoy it (for example, gifting a house to children but continuing to live there rent-free), the asset is still included in the donor’s estate for IHT purposes. The rules are found in sections 102–102C of the Finance Act 1986.
Worked Example 1.1
Aisha gives her house to her son but continues to live in it without paying market rent. She dies five years later. Is the house included in her estate for IHT?
Answer: Yes. This is a gift with reservation of benefit. The house is treated as part of Aisha’s estate at death and is subject to IHT.
Avoiding a GROB
The GROB rules do not apply if the donor pays full market rent for continued use of the asset, or if the donor ceases to benefit from the asset at least seven years before death.
Key Term: market rent The rent that would be paid for the use of the property on the open market between unconnected parties.
Key Term: full consideration Payment or value given in return for the use or enjoyment of an asset, equivalent to what would be agreed at arm’s length.
Worked Example 1.2
Ben gifts his holiday cottage to his daughter but continues to use it for two weeks each year, paying a fair market rent for those weeks. Does the GROB rule apply?
Answer: No. As Ben pays full market rent for his use, there is no reservation of benefit and the cottage is not included in his estate for IHT.
Exam Warning
If the donor only pays a token or below-market rent, the GROB rules will still apply. Always check if the benefit retained is more than negligible.
Associated Operations
The anti-avoidance rules also target arrangements where a series of transactions are used to achieve a tax advantage. HMRC can treat connected steps as a single transfer.
Key Term: associated operations Two or more transactions or arrangements that together affect the same property or are designed to achieve a particular outcome for IHT.
If a person structures their affairs so that, for example, they give away an asset but arrange to receive a benefit through a separate agreement, HMRC may treat the steps as one transaction for IHT.
Worked Example 1.3
Clare gives her shares in a family company to her brother. At the same time, her brother agrees to pay Clare an annual sum for “consultancy services” that is not genuinely for work done. Can HMRC treat this as an associated operation?
Answer: Yes. If the payments are not genuine, HMRC may treat the arrangement as a single transaction designed to avoid IHT, and the shares may be treated as not effectively given away.
Pre-Owned Assets Tax (POAT)
Where the GROB rules do not apply, the pre-owned assets tax (POAT) may impose an income tax charge if a person continues to benefit from assets they previously owned.
Key Term: pre-owned assets tax (POAT) An income tax charge on individuals who benefit from assets they previously owned but have given away, where the GROB rules do not apply.
POAT is most relevant to land, chattels, and certain intangible assets. If a person gives away their house but continues to live there and the GROB rules do not catch the arrangement, POAT may apply to charge income tax on the benefit enjoyed.
Key Term: chattel A moveable item of personal property (not land).
Worked Example 1.4
David gives his art collection to his children but keeps the paintings hanging in his home. The GROB rules do not apply because he claims to have given up ownership. Does POAT apply?
Answer: Yes. If David continues to enjoy the chattels, POAT may apply and he may have to pay income tax on the annual value of the benefit.
Settlor-Interested Trusts
If a person sets up a trust and can still benefit from it, the trust assets may be included in their estate for IHT.
Key Term: settlor-interested trust A trust where the settlor or their spouse/civil partner can benefit from the trust property.
If the settlor retains an interest, the value of the trust assets may be included in their estate for IHT, and anti-avoidance rules may also apply to prevent tax avoidance.
Practical Impact on IHT Planning
The anti-avoidance rules mean that common strategies to reduce IHT, such as giving away assets but continuing to use them, are unlikely to be effective unless the donor genuinely gives up all benefit. HMRC has wide powers to challenge arrangements that are artificial or designed to avoid tax.
Revision Tip
Always check if the donor has retained any benefit, directly or indirectly, from the asset given away. If so, the GROB or POAT rules may apply.
Key Point Checklist
This article has covered the following key knowledge points:
- Gifts with reservation of benefit (GROB) rules prevent assets being removed from the estate if the donor retains benefit.
- Paying full market rent for continued use of an asset may avoid the GROB rules.
- Associated operations allow HMRC to treat a series of steps as a single transfer for IHT.
- Pre-owned assets tax (POAT) may impose an income tax charge where GROB does not apply but the donor continues to benefit.
- Settlor-interested trusts may result in trust assets being included in the settlor’s estate for IHT.
- Anti-avoidance rules are designed to counteract artificial arrangements and ensure the effectiveness of IHT.
Key Terms and Concepts
- gift with reservation of benefit (GROB)
- market rent
- full consideration
- associated operations
- pre-owned assets tax (POAT)
- chattel
- settlor-interested trust
