I am 74 years old and rent out a flat which I have owned for seven years. I transferred ownership two years ago with the land registry such that the flat now belongs one quarter to me and one quarter to each of my three children, who are all working and over 18. I have continued to receive the rent after deductions and have paid tax myself on all monies received from the property. I have not passed any rental income to the children, so they would not be expected to pay tax. I was told by one accountant that this would be OK. The benefit of this is that I still get the full rent, and the property, after seven years, will be inheritance tax-free. Is what I’m doing OK, and do I need to put anything else in place? 

Arthur Weller replies:  

Unfortunately, this is not OK. Presumably, the idea behind giving your children three-quarters of the house was so that if you live for seven years after the date of the gift, then when you die, three-quarters of the value of the house will not be included in your estate for IHT purposes. However, your scenario is a case of a gift with reservation (GWR). This is because you are currently receiving the rent due to the part of the house that you have given away. As long as you continue to benefit from the gift that you have given away, the GWR rules say that the gift is still included in your estate, and as far as IHT is concerned, it is deemed as though you never gave away the gift. However, from an income tax perspective, what you are doing is OK – see PIM1030. Perhaps this is what the accountant meant.