The potentially high cost of ineffective estate planning: gifts with reservation of benefit in Chugtai v HMRC

In the 2025 First Tier Tribunal case of Chugtai v HMRC, Mohammed Chugtai’s estate was found liable to pay inheritance tax (IHT) on assets held in trusts created over 17 years before his death. Although Mr Chugtai had transferred a property and a bank account into trusts for his children and excluded himself as a beneficiary, HMRC successfully argued that he had continued to benefit from these assets during his lifetime. As a result, the gift with reservation of benefit (GROB) rules applied, meaning the assets were included in Mr Chugtai’s estate for IHT purposes.

1. What are the GROB rules?

The GROB rules prevent people from avoiding IHT by giving away assets while still using or benefiting from them. Under these rules, broadly speaking, a gift is only effective for IHT purposes if the donor completely relinquishes benefit.

Examples of a gift being caught by the GROB rules include:

• Residing in a property that has been given (in its entirety) to a third party, without paying market rent.
• Using bank accounts or investments that have been transferred away.
• Receiving income or other benefits from gifted assets.

If any benefit is retained and none of the relevant exemptions apply, the gifted asset will be treated as part of the donor’s estate for IHT purposes, as well as being subject to IHT in the hands of the donee, regardless of how long ago the gift was made, and even though the donor may no longer have control of the asset.

Example:

If a donor gives away their home, but still intends to live there rent-free, the results can be damaging for all involved.

The property will still be taxed to IHT at up to 40% on the donor’s death, thereby reducing the net estate available for their heirs, even though the property itself already belongs to a third-party donee (not necessarily the heirs), and there may not be funds immediately available in the estate to pay the IHT. In addition, owning the property will also have tax consequences for the donee: there could be future stamp duty land tax and/or capital gains tax implications, and the property will be subject to IHT in the donee’s estate, so will be taxed at up to 40% on their death as well, essentially doubling the IHT payable overall.

Meanwhile, during the donor’s lifetime, they will have no control over their home, and no security of tenure, meaning their home could be at risk if the donor and the donee have a falling out, or if the donee passes away or faces divorce or bankruptcy, without protecting the donor’s occupation of the property.

2. What happened in Chugtai v HMRC?

• Mr Chugtai created two trusts in 2000: one for a property and one for a bank account.
• He excluded himself as a beneficiary but appointed himself as sole trustee.
• He continued to live in the property and earned income from an adjoining shop.
• He used the bank account for personal expenses.
• After his death in 2017, HMRC argued that Mr Chugtai had not fully given up benefit of the assets.
• The Tribunal agreed and included the trust assets in his estate for IHT.

3. What can we learn from this?

• The reality of how assets are used can matter more than paperwork

Even if legal documents set up a trust and exclude you as a beneficiary, or transfer ownership out of your hands altogether, failure to follow the GROB rules can lead to unintended consequences in practice. It is important to understand any estate planning arrangements you have created, to ensure you are prepared for their consequences. Indeed, when gifting assets outright or to a trust, you must be willing to give up ownership and any associated benefits altogether, in order for the gift/trust to be effective for IHT purposes. If you need, or might need, the use of or income from an asset, you should not give it away.

• Proper professional advice is essential

Estate planning is complex. Specialist advice helps ensure gifts and trusts are structured so you do not inadvertently retain any benefit. If implementing a trust structure, qualified professionals can also provide appropriate documentation and guidance to the trustees to ensure that the assets are managed and utilised correctly, whilst still meeting your wishes and objectives.

• Estate planning arrangements need regular reviews

Circumstances and tax laws change over time. Regular reviews ensure your estate planning remains effective and compliant with current legislation.

4. What are the risks of ignoring these points?

• Gifts may fail for IHT purposes, causing unexpected tax bills.
• Failing to seek proper advice at the time of a gift of property could unintentionally result in capital gains tax and stamp duty land tax liabilities.
• Continued use of gifted assets can trigger costly disputes with HMRC post-death.
• Outdated arrangements may no longer provide the intended tax or succession benefits unless carefully managed and reviewed.

5. Takeaway

The Chugtai v HMRC case is a powerful reminder that:

• Current legislation must be strictly followed when making lifetime gifts or setting up trusts.
• Documents alone are not enough – how you use assets also matters.
• Seek specialist advice before making gifts or establishing trusts.
• Review your estate planning regularly to keep it aligned with current laws and personal circumstances.

Getting this right helps protect your estate from unintended IHT and ensures your assets pass to your chosen heirs.

If you would like assistance with your estate planning, or have any queries about this topic, please do not hesitate to get in touch with Wendy Hall, Robert Evans, or any member of the Private Client team.