Canada Life International is changing the valuation basis it uses for its discounted gift products after the Capital Taxes Office highlighted a change in position.
From today the company says it will be reducing the discount figures it uses in its valuation calculations, for products such as Discounted Gift Trusts, after HM Revenue and Customs (HMRC) informed the company of a change in their thinking, including the need for an "open market buyer" approach to valuations.
In a DGT the settlor ‘gifts’ capital into a trust for their family, but retain rights to a regular income stream while they are still alive. So for Inheritance Tax (IHT) purposes the value of the gift is the amount of capital ‘gifted’ to the trust minus the lump sum value of the settlor's regular payments.
However Canada Life says following discussion with the CTO branch of HMRC it will be reducing the discount valuations to reflect the recent increases in interest rates, which mean the value of the lump sum which pays out the income stream to the settlor - and which acts as a discount for IHT purposes - will be reduced.
The company says the move reflects the fact an “open market buyer” is less likely to buy an income stream, similar to a DGT, when they could get a higher return if they just kept the money in a savings account.
In addition it says the recent discussions between its technical team and the HM Revenue and Customs (HMRC) actuary at the CTO, have resulted in the CTO actuary taking the view an “open market buyer” approach is needed in the valuation process.
The CTO argues an “open market buyer” would want insurance cover to protect against the risk of an early death ending the regular payments unexpectedly, but Canada Life points out this extra cost would reduce the price the buyer would be willing to pay for the right to a regular income stream.
Since HMRC highlighted the changes in its thinking to Canada Life, the company says it is “anxious to ensure our gift valuations are acceptable to CTO”, and has therefore “taken on board the CTO actuary’s views and recommendations in the revised discount tables we are now publishing”.
Andy Marks, sales director at Canada Life, adds: “As major providers in this market we feel it is essential that advisers and their clients can trust that Canada Life gift valuations are in line with the Capital Taxes Office actuary’s valuation in all respects.”
As a result it says all new DGT cases starting on or after 28th February 2007 will have gift valuations based on the revised discount tables, while it points out it will also be reviewing the gift valuations for all existing cases which have been started since the IHT changes to trusts were announced in the 2006 Budget last March.
Canada Life confirms it will be notifying these existing clients and their financial advisers of the new valuations as soon as possible, although it says clients who have not yet reported their gifts to the CTO will be able to show the revised value on their IHT100 account forms, while those who have already reported their gifts will need to notify the CTO of the revised value.
However Christophe Daviron, director of institutional sales at Canada Life, admits the changes mean products will be less effective as more of the money gifted into a trust will count towards a person's estate.
He adds: "By making these changes the Revenue has reduced the IHT planning efficiency of some of these arrangements. Although HMRC has admitted these changes have not been widely broadcast, we decided clients want the safest option, which in this case is the Revenue's understanding of the current position."
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
Joined as head of strategy, multi asset, in June
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