The recent case of Afsha Chugtai v HMRC [2025] serves as a crucial reminder of the complexities surrounding inheritance tax (IHT) planning, particularly in relation to gifts with reservation of benefit.

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Key Findings from the Case

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In this case, the First Tier Tribunal (FTT) ruled that the deceased, Mohammed Chugtai, had made gifts but continued to benefit from them, meaning the assets in question were still part of his estate for IHT purposes.

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Mohammed Chugtai had set up two trusts in 2000—one for funds held in a Santander bank account and another for a property. Although these trusts were intended to remove the assets from his estate, HMRC argued that he had retained a benefit, making them subject to IHT. Evidence showed that:

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• He continued to live in the property until his death in 2017.

• He used the Santander account for personal expenses.

• He received rental income from an adjacent shop, which was deposited into the trust account.

 

The tribunal found that these actions meant the assets were not enjoyed to the exclusion of the donor, triggering the gift with reservation of benefit rules.

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What is a Gift with Reservation of Benefit?

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A gift with reservation of benefit occurs when a person gifts an asset but continues to derive a benefit from it. For example, if someone transfers ownership of their home to a child yet continues to live in it without paying market rent, HMRC will still consider the property part of their estate for inheritance tax purposes.

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How to Avoid This Issue?

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To ensure a gift is fully excluded from an estate for inheritance tax purposes, the donor must completely relinquish ownership and benefit. If they wish to continue using the asset—such as residing in a gifted home—they must pay full market rent to the new owner.

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Other Common Mistakes in IHT Gifting

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Beyond gifts with reservation of benefit, several other pitfalls can lead to unexpected tax liabilities:

• Ignoring the Seven-Year Rule – Gifts made within seven years of death may still be subject to IHT, with a sliding scale of tax applied between three and seven years.

• Overlooking the Annual Gift Allowance – Individuals can gift up to £3,000 per tax year without it being counted towards their estate, but many fail to take advantage of this exemption.

• Failing to Document Gifts Properly – Keeping clear records of gifts ensures they are correctly accounted for and reduces disputes with HMRC.

• Misunderstanding Exemptions – Certain gifts, such as those between spouses or to charities, are entirely exempt from IHT, but many people don’t structure their gifting efficiently.

• Not Seeking Professional Advice – Complex estates or large gifts may require tailored tax planning to avoid unnecessary liabilities.