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HMRC have published a Technical Note setting out their approach to Discounted Gift Schemes (DGS) and their interaction with the Inheritance Tax (IHT) legislation.

In particular, the note examines the valuation of lifetime transfers and the underlying valuation methodology. It also sets out the approach HMRC will adopt in joint settlor cases, which, in some cases, will be more precise than that adopted up to now.

Whilst there are no fundamental changes to HMRC's overall approach towards DGSs at this stage, at the end of the note, HMRC indicate that they are proposing to make a change to one element of the basis of valuation that they use to reflect current market conditions.

HMRC has recently reviewed its interest rate basis. In the light of recent rises in interest rates, HMRC are proposing to change that basis with effect from 1 June 2007 when a valuation rate of interest of 6% pa will be adopted. HMRC's analysis indicates clearly that such a rise in that rate is warranted and reintroduces the differential over base rate and corresponds to a 1% differential over short term Gilts as at 2 April 2007. The valuation basis is kept under review to ensure that it continues to reflect open market conditions. It is HMRC's intention to publish details of any future changes to the valuation basis on their website.

Broadly, a DGS involves a gift of a bond from which a set of rights are retained, typically withdrawals or a set of successively maturing reversions. The retained rights are sufficiently well defined to preclude the gift being regarded as a gift with reservation (GWR) for IHT purposes.

The gift is a transfer of value for IHT purposes whose value is determined by the loss to the estate principle as set out in IHTA 1984 s 3(1) and quantified by the difference between the amount invested by the settlor and the open market value (OMV) (IHTA 1984 s.160 refers) of the retained rights.

It is emphasised that the note sets out HMRC’s practice and is not seeking to prescribe the approach that must be taken to establish the chargeable value for IHT. Alternative approaches may be used to arrive at broadly similar results and HMRC continue to be open to considering and agreeing alternative valuation bases that achieve that aim.

Link

Discounted Gift Schemes (DGSs): A Technical Note from HMRC