A gift with reservation (GWR) arises when an individual ostensibly makes a gift of his property to another person but retains for himself some or all of the benefit of owning the property. The legislation defines a gift with reservation with reference to ‘enjoyment of the property’. If possession and enjoyment are not effectively transferred, then regardless of legal ownership, the property is taxed as part of the estate of the donor.
The purpose of the GWR provisions is to prevent a taxpayer from reducing the value of his estate subject to IHT whilst at the same time continuing to benefit from the property given away. Often a client’s initial approach to inheritance tax planning will be to put a significant asset, usually his home, ‘in the name of’ a child or other eventual beneficiary under the misapprehension that it will remove the asset from assessment to IHT on his death. The GWR anti-avoidance rules render such action ineffective for IHT.
The term ‘gift with reservation’ and its abbreviation GWR are interchangeable with the term ‘gift with reservation of benefit’ and its abbreviation GROB.
Definition of a gift with reservation
The legislation is not included in the main Inheritance Tax Act 1984 but in Finance Act 1986. It was included as an afterthought when it was recognised that the introduction of potentially exempt lifetime transfers (a new provision when inheritance tax replaced capital transfer tax) might promote avoidance unless there was a measure to prevent the continued ‘enjoyment’ of property given away. FA 1986, s 102(1)
It applies to gifts on or after 18 March 1986 where either:
- “(a) possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or
- (b) at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise.”