IHT Double Charges Relief: Preventing the Same Asset Being Taxed Twice
When a gift with reservation of benefit is also a failed PET, the same property can in principle face IHT twice. Double charges relief under s104 IHTA 1984 ensures only the higher of the two charges applies — not the sum of both.
How the Double Charge Arises
Donor gifts property
Treated as a PET (potentially exempt transfer) — no IHT if donor survives 7 years
Donor continues to benefit
Lives in the house rent-free → gift with reservation under s102 Finance Act 1986
Donor dies within 7 years
PET fails → chargeable in donor's estate. AND reserved property also in death estate → double charge
Double charges relief applies
s104 IHTA 1984: only the higher of the two IHT calculations is collected — the other is relieved
Frequently Asked Questions
What is IHT double charges relief?
IHT double charges relief prevents the same property from bearing inheritance tax in full twice. It arises most commonly when: (1) A person makes a potentially exempt transfer (PET) — for example, a gift of shares or a property; (2) The donor dies within 7 years, making the PET a 'failed PET' — the gift becomes chargeable to IHT in the donor's estate; (3) The same property is also included in the donor's death estate (for example, because it was a gift with reservation of benefit that remained in the estate). Without relief, IHT would be charged on the same value twice. Section 104 IHTA 1984, together with the Inheritance Tax (Double Charges Relief) Regulations 1987 (SI 1987/1130), provides that in such cases only the higher of the two charges applies — the other is relieved.
When does the same property get charged to IHT twice?
The most common scenario is a failed PET combined with a gift with reservation of benefit: (1) Donor transfers an asset to a beneficiary — this is a PET; (2) The donor continues to benefit from the asset (for example, continues living in a gifted house rent-free) — this makes it a gift with reservation under s102 Finance Act 1986; (3) On the donor's death within 7 years: (a) the failed PET is chargeable in the donor's estate under s3A IHTA 1984 (because the donor died within 7 years); AND (b) the reserved benefit property is also included in the death estate under s102(3) Finance Act 1986. The same property is therefore potentially charged twice. Double charges relief applies so that only the higher of the two potential charges is collected.
How is the double charges relief calculated?
Under the Double Charges Relief Regulations 1987, HMRC calculates IHT on both the 'reservation' route (property included in death estate) and the 'failed PET' route (gift chargeable on death), then applies the method that produces the higher tax. The alternative method is left out of account. In practice: (1) Calculate IHT as if the asset is part of the death estate (reservation basis); (2) Calculate IHT as if it is a failed PET (gift within 7 years basis); (3) Use whichever calculation produces the greater IHT; (4) The other calculation is ignored. This means the property effectively bears the maximum of the two charges, not the sum of both. The mechanics are complex, particularly where taper relief, annual exemptions, or BPR/APR also apply — professional advice is recommended.
Does double charges relief apply to chargeable lifetime transfers?
A similar double charge can arise where a donor makes a chargeable lifetime transfer (CLT) — for example a gift into a discretionary trust — and then the gift is also included in the estate on death (for example, as a result of gift with reservation). The CLT was already subject to IHT at 20% on entry. On death, the value becomes chargeable at 40% (less the 20% already paid). If the reserved property is also in the death estate, there is again a potential double charge. The Double Charges Relief Regulations also cover this scenario — the higher of the two charges applies and the other is relieved. Again, the interaction with the 7-year cumulation period and CLT cumulation in the death estate can be complex.
How can double charges be avoided in estate planning?
The cleanest way to avoid double charges is to avoid gifts with reservation of benefit entirely: (1) If you give away a property, do not continue to occupy it rent-free — pay a market rent (which makes it a PET without reservation); (2) Use a trust structure (such as a life interest trust for a surviving spouse) rather than an outright gift where you need to retain benefits; (3) Use the 'pre-owned asset tax' (POAT) regime as an alternative charge — paying income tax on the notional benefit in lieu of IHT charges (which avoids the double charge but has its own costs); (4) Seek specialist IHT planning advice before making large gifts where you may need to retain any benefit. Gifts with reservation are one of the most common IHT planning errors.
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