Advisers have been given more clarity on the issue of Discounted Gift Trusts, following the publication of a technical note from HM Revenue & Customs.
The five-page 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 rights.
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 them.
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 for advisers”.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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