IHTM47060 | Long-term UK residence test: Gifts with reservation of benefit

A gift with reservation (GWR) (IHTM14301) is where an individual (the donor) makes a gift and continues to be able to benefit from the property given away. Where the donor retains a benefit at the date of death, the property gifted is deemed to be part of the donor’s estate for Inheritance Tax (IHT) purposes, with provisions to trace into any replacement property. Any cessation of reservation, within 7 years of death, is treated as a Potentially Exempt Transfer (IHTM04057) for IHT purposes.

If a donor is long-term UK resident (IHTM47000) at the time of their death (or when the reservation of benefit ceases), any foreign property given away is not excluded property and is subject to charge. This will be the case even if the gift was made when the donor was not long-term UK resident.

Where property is settled on trust and a benefit is reserved, the property will be subject to charge if the settlor is a long-term UK resident at death (or when the reservation of benefit ceases). The exception to the rule is where foreign property became comprised in the settlement before 30 October 2024 and was excluded property (IHTM04251) at that time (IHTM47022). Where the settlor dies on or after 6 April 2025 and is long-term UK resident when they die, the foreign property will be disregarded for the purposes of the GWR charge so long as it has remained settled property throughout (even if not in the same settlement) and it is invested outside the UK, is in Authorised Unit Trusts (AUTs), or is a share in an Open-Ended Investment Company (OEIC), at death (or when the reservation of benefit ceased) (IHTM14396).

Any UK property comprised in the trust will not benefit from the transitional provision, even if it is later sold and is replaced by foreign property.

However, excluded property comprised in a settlement immediately before 30 October 2024 may nevertheless be subject to charge under the relevant property regime (IHTM42161) from 6 April 2025 (IHTM47023).

Where there are additions to settlements, or new settlements made, on or after 30 October 2024 the GWR (IHTM14301) provisions will apply in accordance with the new long-term residence rules (IHTM47020).

The position before 6 April 2025

If the settlor’s death (or the cessation of reservation of benefit) occurs before 6 April 2025 the test for excluded property (IHTM04251) is the settlor’s domicile (IHTM13000) at the time property was added to the settlement. Any foreign property in the settlement is not chargeable to Inheritance Tax (IHTM27220) if the settlor was domiciled outside the UK at the time that property was settled. This rule applies even if the settlor had later acquired a domicile of choice (IHTM13000) in the UK, or was deemed domiciled (IHTM13024) in the UK, at the date of death (or when the reservation of benefit ceases).

For property gifted to another individual, foreign property is only out of scope of the GWR provisions if the donor is domiciled outside the UK at death (or when the reservation of benefit ceases).

Examples

Example 1

Sharon was born in South Africa which is her ‘domicile of origin’. She has been resident in the UK for the last 15 years. In October 2010, prior to her move to the UK, she settled foreign shares into a settlement. Sharon can benefit under the settlement terms.

• Sharon made the settlement before she became deemed domiciled, the foreign shares were excluded property when they became comprised in the settlement. Any excluded property comprised in the settlement as at 30 October 2024 will benefit from the transitional provision and will be disregarded for the purpose of the GWR provisions.

The foreign shares will therefore not be subject to the gift with reservation provisions even if Sharon is long-term UK resident at the date of her death. So long as the foreign property in the settlement is invested outside the UK, within an AUT, or is a share in an OEIC at the date of death (or cessation of the reservation of benefit), it will be disregarded for the purpose of the GWR provisions.

• If the settlement comprises UK assets or assets falling within IHTA84/Schedule A1 (IHTM04311) (overseas property with value attributable to UK residential property) at the date of her death, then such property will not benefit from this treatment.

• The relevant property regime will apply to the settlement from 6 April 2025 whilst Sharon is long-term UK resident.

Example 2

Dave is UK domiciled and was resident in the UK until 2020-2021. He buys a property in Spain and settles this property into trust on 10 November 2022. Dave retains a benefit under the terms of the trust.

• The property was not excluded property at the time it became comprised within the settlement.

• The transitional provisions will not apply because the property comprised within the settlement was not excluded property before 30 October 2024.

• Dave will not be long-term UK resident from 6 April 2031 and the foreign settled property in which he has reserved a benefit will be disregarded for GWR purposes after this time.