Advisers have been given more clarity on the issue of Discounted Gift Trusts,
following the publication of a technical note from HM Revenue & Customs.
note confirms the Revenue has not made any fundamental changes to its
overall approach to DGTs, although it is proposing to alter one element of the
basis of valuation which is used to reflect current market valuations.
HMRC says following recent press interest in the issue, it believes it is ‘an
opportune moment to set out HMRC’s approach to DGTs and their interaction with
Inheritance Tax (IHT) legislation’.
The note focuses particularly on the valuation of lifetime transfers and the
underlying valuation methodology, although it adds it has taken the opportunity
to set out a more precise approach it will adopt in joint settler cases.
It confirms the methodology providers should use when valuing a gift in a
DGT, and therefore the discount available for IHT purposes will be based on the
settlor’s age, sex, health and insurability at the date of the gift.
And on the issue of joint settlers, HMRC says until now it has taken a
‘pragmatic approach’ to calculating the value being transferred, which has been
to value the retained rights in their entirety – rather than individually – and
deduct this amount from the sum invested.
It argues in cases where joint settlors are of similar age and in similar
health, the results of this approach does not differ dramatically from an
individual approach, however following the changes in the Finance Act 2006, it
says there are more DGT cases with a significant difference in age or state of
health between joint settlers.
As a result it says the pragmatic approach is no longer reasonable and has
been asked to clarify the correct valuation method as different providers are
using different calculations – leading to a lack of consistency.
So the note sets out the approach it will follow for all DGTs from 1 June
2007, in addition to cases where a transfer has taken place before this date but
where the pragmatic approach would ‘provide an unreasonable valuation’ and
‘substantial sums’ are involved.
In its view, HMRC now says the correct approach is to value the retained
rights in their entirety, and then to apportion this value between the joint
settlers with regards to the Open Market Value (OMV) of each settlor’s retained
The technical note also addresses the issue of underwriting the life of a DGT
settler, with HMRC stating its ‘preference’ is for ‘full under-writing to be
carried out before the DGT is effected’.
Colin Jelley, head of tax and financial planning at Skandia, says this
guidance will provide clarity for advisers and also welcomes the fact HMRC
engaged with the industry and consulted on these changes before implementing
He says in practical terms the new guidance will not change the way Skandia
operates these trusts as the methodology for valuing gifts is already built into
its standard approach.
But he adds: ‘A more standard approach to calculating discounts in the
industry is to be welcomed, as it is going to make things more straightforward
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