CGT or IHT or both

Yes, this one of those cases where there is contradictory treatment. For CGT purposes the gift was effective despite the reservation which made it ineffective for IHT avoidance purposes.

As I understand it you are liable for the gain which occured over the course of the last 10 years, and the donor's estate will include the market value of the property at the time the gift was made (as opposed to its market value at date of death).

When you say the estate was "well below the IHT threshold", I hope you can be sure this is the case even if the value of the property is counted as part of the estate.

I do nto think this is correct. Surely it is the value of the house at the time of death that is used for the IHT calculation The value at the time of the gift is used for the GCT calculation. The gain in value between the two dates is therefore potentially taxed twice.

Robert

I'm not sure either, but I prefer my version to yours, because:

The fact that it was a gift with reservation doesn't mean the IHT rules seek to pretend the gift did not happen, they simply seek to negate the effect which treating it as a gift without reservation would have had on the IHT due. That effect (had the gift been without reservation) would have been to make the value of the gift at the time it was made assessable as part of the estate, would it not?

After all, instead of gifting the house to the donee, the donor could have gifted him enough money to buy the house off him.

No, RR, not right. A 'gift with reservation' means HMR&C assume that for the purposes of IHT the gift didnt occur. That means it is the value on death that is included for IHT.

The donee would be liable for CGT on the chargeable gain on eventual sale, i.e.sale price less value at time of gift, after indexation and Taper relief and annual allowances, then any IHT paid that related to this failed PET would be offset against the CGT bill. Sadly for the donee, it appears there is no IHT to offset.

Thanks for the advice guys. Will have to bear in mind when sorting out my own stuff.