Gifts with reservation of benefit

Q: What happens to the tax?

There are two possible outcomes: The reservation is still in place at death. Section 102(3) treats the property as part of the giver's estate immediately before death, at its value then. It is taxed with the rest of the estate even though it passes under the gift, not the will. Exemptions available on death, such as the spouse or charity exemption, can apply if the property actually passes to an exempt person (IHTM14303). The reservation ends during the giver's lifetime. Section 102(4) treats the giver as making a potentially exempt transfer at that moment. A new seven year clock starts from the date the benefit stopped, not the date of the original gift. The annual exemption cannot reduce this deemed gift (IHTM14343). Because the original gift may itself have been a potentially exempt transfer, the same value could be taxed twice if the giver dies within seven years. The Inheritance Tax (Double Charges Relief) Regulations 1987 (SI 1987/1130) prevent this. HMRC makes two calculations, one taxing the property as part of the estate or as the deemed gift and ignoring the original gift, the other taxing the original gift and ignoring the later charge, and collects tax on whichever produces the higher amount (IHTM14712).

If you give something away but keep using it or benefiting from it, the gift with reservation rules in section 102 of the Finance Act 1986 treat it as still part of your estate when you die, however long ago the gift was made. The main exceptions are paying a full market rent or price for your use, minimal use, a later move back in because you can no longer look after yourself, gifts that are exempt for other reasons, and sharing a home with the person you gave a share to.

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What is a gift with reservation?

Without special rules, someone could transfer their house to their children, keep living in it, survive seven years and pass it on free of Inheritance Tax. The gift with reservation rules were introduced in 1986 to stop gifts “with strings attached” (IHTM14301). Under section 102(1) of the Finance Act 1986 (FA 1986), a gift by an individual is caught if either:

the person receiving it does not genuinely take possession and enjoyment of it at or before the start of the relevant period; or
at any time in the relevant period, the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the giver and of any benefit to the giver by contract or otherwise.

The relevant period runs from the later of the date of the gift and seven years before the giver’s death, up to the death. Both tests are questions of fact. A benefit counts even if it is informal and not legally enforceable (IHTM14333).

What happens to the tax?

There are two possible outcomes:

The reservation is still in place at death. Section 102(3) treats the property as part of the giver’s estate immediately before death, at its value then. It is taxed with the rest of the estate even though it passes under the gift, not the will. Exemptions available on death, such as the spouse or charity exemption, can apply if the property actually passes to an exempt person (IHTM14303).
The reservation ends during the giver’s lifetime. Section 102(4) treats the giver as making a potentially exempt transfer at that moment. A new seven year clock starts from the date the benefit stopped, not the date of the original gift. The annual exemption cannot reduce this deemed gift (IHTM14343).

Because the original gift may itself have been a potentially exempt transfer, the same value could be taxed twice if the giver dies within seven years. The Inheritance Tax (Double Charges Relief) Regulations 1987 (SI 1987/1130) prevent this. HMRC makes two calculations, one taxing the property as part of the estate or as the deemed gift and ignoring the original gift, the other taxing the original gift and ignoring the later charge, and collects tax on whichever produces the higher amount (IHTM14712).

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What counts as keeping a benefit?

GOV.UK gives three everyday examples: giving your home to a relative but still living there, giving away a caravan but still using it free for holidays, and giving away a valuable painting but still displaying it in your house. Other common cases are:

giving a let property to a child but continuing to receive the rent;
settling assets on a discretionary trust where you are, or could be added as, one of the beneficiaries (IHTM14393);
giving cash to a child who uses it to buy your house while you stay living there, which HMRC may treat as a gift of the house through associated operations (IHTM14372).

“Virtually” means to all intents, so trivial benefits are ignored. HMRC’s examples at IHTM14333 of use that does not count include staying in a house you gave away for no more than two weeks a year without the owner, or less than a month a year with them, ordinary social visits, short stays while recovering from an operation, babysitting, and occasional lifts in a car you gave away. Staying most weekends, or sharing a holiday home on an occasional basis, goes beyond this.

What are the main exceptions?

Paying full consideration

Schedule 20, paragraph 6(1)(a) FA 1986 disregards your occupation of property, or possession of a chattel such as furniture or a painting, if it is for full consideration in money or money’s worth. In practice that means a market rent. HMRC looks for a bargain negotiated at arm’s length by independently advised parties on normal commercial terms (IHTM14341). The rent must stay at full market value throughout the relevant period: in HMRC’s example at IHTM14335 a commercial rent paid for ten years and then left unreviewed turned the gift into a gift with reservation.

Moving back in through old age or infirmity

Paragraph 6(1)(b) disregards your occupation of property you gave away if it results from a change in your circumstances that was unforeseen at the time of the gift, you have become unable to maintain yourself through old age, infirmity or otherwise, and the occupation is reasonable provision for your care by the person you gave it to. HMRC applies this only where that person is a relative of you or your spouse or civil partner (IHTM14342).

Gifts exempt for another reason

Section 102(5) switches the rules off for gifts that are exempt as transfers to a spouse or civil partner, small gifts, wedding gifts, gifts to charities, political parties, housing associations, for national purposes or public benefit, maintenance funds and employee benefit or employee ownership trusts (IHTM14318). The annual exemption and the exemption for gifts out of income are not on the list.

Sharing a home

For gifts since 9 March 1999 of an undivided share in a property, section 102B FA 1986 says there is no reservation while you and the recipient both live there and you receive no more than a negligible benefit from them connected with the gift. A typical case is a parent giving a half share of the family home to an adult child who lives there too. HMRC’s examples at IHTM14332 show that a share given to a child who never moves in is caught unless the parent pays that child a full rent.

A worked example

Illustration only. In 2018 Peter gave his holiday cottage, then worth £300,000, to his daughter. He kept using it for about six weeks every summer without paying anything. In April 2024 he began paying a full market rent agreed through a letting agent for the weeks he used it. He died in 2027 when the cottage was worth £360,000.

From 2018 to April 2024 the cottage was a gift with reservation. When Peter started paying full rent, the reservation ended and he was treated as making a potentially exempt transfer of the cottage’s value at that date. As he died within seven years of April 2024, that deemed gift is brought into the calculation, and under the double charges regulations HMRC compares it with taxing the original 2018 gift and charges whichever produces more tax. Had he paid full rent from the start, the 2018 gift would have dropped out of account in 2025.

How do the rules interact with other taxes?

Where a giver has given something away and still benefits, but the gift with reservation rules do not apply, an income tax charge may arise instead under the pre owned assets rules (IHTM14301). The gift itself is still a disposal for Capital Gains Tax at market value. The property focused version of these rules, including Stamp Duty Land Tax, is on our page on gifting property to children.

What are the common mistakes?

Assuming the seven year clock runs from the original gift when the benefit continued.
Paying a nominal rent or a share of bills instead of a full market rent.
Keeping the giver as a possible beneficiary of a trust “just in case”.
Executors failing to include property subject to a reservation on the IHT400 account because it no longer belonged to the deceased.
Assuming that because a gift used the £3,000 annual exemption it cannot be a gift with reservation.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.