The concept that a gift made can be taken back (boomerang gift) at some point in the future might be considered socially unacceptable. Gifts are meant to be given with ‘no-strings attached’, so what happens when a gift you gave comes back around?
Low value gifts for special occasions such as birthdays, weddings and Christmas are normally made out of a person’s normal income and would be exempt from inheritance tax.
There are, however, two types of gifts that can ‘fall back’ into your estate on your death:
- Potentially Exempt Transfers (PET) – PETs are gifts of capital which results in the loss of benefit to the gifted asset, and the loss to your estate in value. They are known as ‘potentially’ exempt as their value will be attributed to you estate should you die within seven years of making the gift. This is known as the ‘seven year’ rule which was introduced by the Inheritance Tax Act 1984 (IHTA 1984)to stop people from intentionally minimising their estate for inheritance tax purposes.
- Gifts with Reservation of Benefit (GROB) – A GROB occurs where you gift an asset to a person, but continue to enjoy the benefit of the gifted asset. For example, if the asset gifted is a property, a retained benefit would be if you continued to live in the gifted property rent free or pay less that the market rent. The Finance Act 1986 also introduced anti-avoidance measures of its own for inheritance tax purposes in the form of a GROB.
Continuing with the example of a gift of property, if at some point in the future, the benefit is released, either by paying market rent or moving out of the property, then the GROB becomes a PET and is subject to the seven year rule from the date the benefit ended.
For more information on gifts of cash that are classed as a GROB see Samantha Roberts’ article.
Whilst making a gift to friends and family is a nice gesture, the idea of a ‘no-strings attached’ gift is almost a thing of the past. If you are thinking of making a large gift, it is advisable to seek advice from an independent legal or financial advisor who can take you through the future implications of your gift in more detail.