IHTM42254 | The settlor: Gifts with Reservation

For a definition of a Gift with Reservation (GWR) on discretionary trusts and details of tracing settled assets, see the lifetime transfers chapter of this manual, from IHTM14393

In the simplest terms, if a settlor transfers property to a discretionary trust of which they are a member of a class of potential beneficiaries, the settlor has reserved a benefit. This applies despite the argument that, in the nature of a discretionary trust, the trustees might never give the settlor any benefit.

The result for the settlor

• When the original transfer is made, it is immediately chargeable. (IHTM42251)

The reservation of benefit will then have one of two effects

• The reservation may be released in the settlor’s lifetime, in which case it is a deemed potentially exempt transfer (PET) at the time it is released, (IHTM04072), or

• The property may still be subject to the reservation at the settlor’s death and be fully chargeable as part of the death estate.

The result for the trust

Whether there is a GWR claim or not, the normal discretionary trust charges are unaffected. Ten-year anniversary (TYA) and proportionate charges continue to apply.

• The GWR double charges relief applies only to charges on the settlor as an individual and do not affect tax on TYA or proportionate charges. (IHTM14711)

• The existence of a claim on death at a (probably) higher value is not brought into account with the discretionary trust for any later proportionate charges. The rate remains based on the original ‘historic’ value at set-up or the last TYA.

However, any Inheritance Tax due from the trust because of death or a failed PET will be a liability of the trustees.