Inheritance tax – gift schemes

Discounted gift schemes can exist where a gift or gifts are made by an individual whose estate is likely to face an IHT charge and where the gift or gifts are structured to ensure that the value of the gift is less than the value of the assets being removed from the individual’s estate. The most common schemes are insurance product based.

Revenue & Customs Brief 22/13 Discounted Gift Schemes: Ten Year Anniversary values for Inheritance Tax and updated guidance on the calculation of transfer values when Discounted Gift Schemes are effected sets out HMRC’s view on 'how to calculate the value that will be subject to Inheritance Tax for a Discounted Gift Scheme held in a relevant property trust when the ten year anniversary charge arises for the trust.' The brief also updates the guidance that HMRC has made available. 

The brief reaffirms that the 'open market purchaser will take account of the fund value at the valuation date and will have to allow for:

• the expected withdrawals to be received by the settlor between the valuation date and the settlor's date of death, and 
• the expected delay between the valuation date and the eventual death of the settlor.'

It then states that the 'closest equivalent asset which is sold in the open market is considered to be an interest in reversion.'

Guidance, including worked examples, is then provided on the health of the settlor at the Ten Year Anniversary and options that are available. Updated guidance is highlighted on the calculation of transfer values when a Discounted Gift Scheme is effected. It includes reference to the European Court of Justice decision that the use of gender as a factor in setting insurance premiums is no longer permissible from 21 December 2012 and states that as this is 'one of the main factors used to establish the value transferred when a Discounted Gift Scheme is effected is the cost of insuring the life of the individual who has effected the Scheme, the valuation basis needs to be changed to reflect this significant change in how life assurance premiums are calculated.' It concludes that the 'position at the date of a Ten Year Anniversary is somewhat different. At a Ten Year Anniversary the open market purchaser would not be concerned to insure the life of the settlor. Rather the purchaser's concern would be in establishing the settlor's life expectancy. This would be affected by the settlor's age, gender and state of health at that time and would use a different valuation basis from that used for valuing the retained rights when a Discounted Gift Scheme is effected.'