Family are hit with £176k Inheritance Tax bill for making this common mistake

A recent case has just come before the First Tier Tribunal when HMRC sought to claim £176k from a grieving family after their father died, which highlights a common misunderstanding of the rules which a lot of families make.

Mr Chugtai’s case

Mohammed Chugtai had given away one of his properties and a shop and placed it in a Trust, which was done to try to avoid some of the death duties which would have otherwise been payable. However, after gifting the property he was required to return to live there with one of his daughters due to her deteriorating mental health meant she could not leave the property.

Unfortunately, this fell foul of inheritance tax rules about Gifts with the Reservation of Benefit (GROB”)

What is a GROB?

The rules about GROBS mean that if an asset is transferred as a gift, then they are not excluded from the inheritance tax calculation if the person giving the benefit is deemed to have substantially benefitted from it.

This catches out a lot of families who wish to try to avoid inheritance tax rules, and preserve a person’s assets, by transferring them into the name of family members. If the person is going to remain living at the property, then it will be deemed a GROB and unfortunately IHT is still payable if that person dies within 7 years.

As Mr Chugtai had benefitted from the property after he had gifted it, it was deemed to form part of his estate still for inheritance tax purposes and the family were left with a bill for £178,000.

First Tier Tribunal

At the hearing one of Mr Chugtai’s other daughters, who was also the Executor of his Will, argued that he had made these decisions more than 7 years before his death, so the value of the Trust should not be included for IHT purposes. Gifts which are made 7 years before someone dies are generally excluded from IHT calculations. She also argued that he had no choice but to return to the property due to her sister’s medical conditions.

However, HMRC successfully argued that he had benefited from the property and therefore it should be included. Solicitors for HMRC referred to a high profile case in which the Judge said:

“Not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot.”

Rates of Inheritance tax paid on gifts, in the event of a donor’s death

Each person has annual allowance of gifts which they are entitled to make. The current rate, as at the date of this article in May 2025, is £3,000 per annum and this can be made to one person or several people. People are also entitled to make unlimited “small” gifts of £250 per person, if you haven’t already used your annual exemption on that same person. Any other gifts are called “potentially exempt transfers”, which are ones which do not fall within the exemptions and which mean that you will potentially be paying IHT on them if you do not survive for 7 years. The rates of IHT payable will depend on when the gift was made within the 7 year period.

For up to date rates and information we would recommend checking the HMRC website, as the figures above will be subject to change.

If you would like to discuss your Will and get some advice regarding your estate and the ways in which you can limit any taxes which may be payable then please do get in touch with our Wills and Probate team on 0208 949 9500.