Definition
A Gift with Reservation of Benefit (GROB) occurs when you give away an asset but continue to use it or benefit from it, meaning it remains in your estate for inheritance tax purposes.
Many people assume giving away assets and surviving seven years removes them from their estate, but reserving a benefit prevents this.
What Does Gift with Reservation of Benefit Mean?
Under the Finance Act 1986, Section 102, a Gift with Reservation of Benefit arises when you give away property but fail to exclude yourself entirely from enjoying it. The legislation prevents reducing inheritance tax while continuing to benefit from assets. HMRC applies two tests: either the recipient doesn't genuinely take possession, or you're not "entirely excluded, or virtually entirely excluded" from benefiting.
The most common scenario involves property. Sarah transfers her £450,000 home to daughter Emma but continues living there without paying rent. When Sarah dies 10 years later, the home (now £550,000) remains in her estate for inheritance tax, despite Emma legally owning it for a decade. The seven-year rule doesn't apply because Sarah reserved a benefit. James gifts his Lake District cottage worth £180,000 to his son but continues spending several weeks there rent-free yearly, keeping it in his estate indefinitely.
The asset's full value is included in your estate on death, charged at 40% inheritance tax above the nil-rate band. Taper relief doesn't apply to GROBs, meaning no tax reduction even if the gift was years ago. The asset remains in your estate indefinitely. If you stop benefiting (by moving out or paying full market rent), only then does the seven-year clock start.
To avoid GROB rules, pay full market rent—the same amount an independent tenant would pay. Margaret avoids GROB by paying her son £1,400 monthly with documented bank transfers. Nominal rent is insufficient. Genuine joint occupation may avoid GROB if the recipient moves in with you. HMRC permits very minor use (approximately two weeks yearly). Professional advice is essential.
Common Questions
"Can I stay in my home after gifting it to my children to avoid inheritance tax?" Yes, but only if you pay them full market rent. If you continue living there rent-free or paying below-market rent, it remains a GROB in your estate for inheritance tax purposes. The seven-year rule won't help.
"I gave my house to my daughter 8 years ago but still live there. Have I avoided inheritance tax?" No. Because you continue living there without paying market rent, this is a GROB. The seven-year rule doesn't apply to gifts with reserved benefits. The house remains in your estate regardless of timing. To fix this, move out or pay full market rent.
"What's the difference between a GROB and Pre-Owned Asset Tax?" A GROB means you gave away an asset but kept benefiting directly, affecting inheritance tax when you die. Pre-Owned Asset Tax is an annual income tax charge when you arrange things to avoid GROB rules but still benefit indirectly.
Common Misconceptions
Myth: If I give my house to my children and live for another 7 years, it won't be counted for inheritance tax, even if I still live there.
Reality: The seven-year rule only applies to genuine gifts where you give up all benefits. If you continue living in the gifted property without paying market rent, it's a GROB and remains in your estate indefinitely. The seven-year clock only starts when you stop benefiting by moving out or paying full market rent.
Myth: I've given my house to my son and now pay him £100 per month to live here, so I'm paying rent and it's not a GROB.
Reality: You must pay full market rent—the same amount an independent tenant would pay. Nominal rent (like £100 monthly for a house with market rent of £1,200 monthly) or family-discount rent is insufficient. HMRC requires rent genuinely reflecting market value, actually paid and properly documented. Below-market rent means the property remains a GROB.
Related Terms
- Lifetime Gift: GROB is a lifetime gift that fails to achieve inheritance tax savings due to retained benefits.
- Inheritance Tax (IHT): GROB rules determine what assets are included in estates for inheritance tax calculation.
- Pre-Owned Asset Tax (POAT): Alternative tax charge when GROB rules don't apply but you still benefit from previously owned assets.
- Potentially Exempt Transfer (PET): A lifetime gift becoming exempt after seven years, but only if it's not a GROB.
- Seven-Year Rule: Timing rule that doesn't apply while a benefit is reserved—the clock starts when reservation ceases.
Related Articles
- Understanding Inheritance Tax: A Complete UK Guide: Foundational context explaining why GROB rules prevent reducing estates while retaining asset benefits.
- Can You Gift Your House to Your Children and Still Live in It?: Practical guidance on structuring property gifts to avoid GROB using the market rent exception.
- The Seven-Year Rule for Inheritance Tax Explained: Explains seven-year exemption for lifetime gifts, with GROB as the crucial exception preventing this rule applying.
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Legal Disclaimer: This glossary entry provides general information about Gift with Reservation of Benefit rules and does not constitute legal or tax advice. GROB rules are complex with substantial tax consequences if mishandled. Before making significant lifetime gifts, especially property, seek professional advice from a qualified solicitor or tax specialist.