Discounted Gift Trusts – valuation of retained interests
Under the terms of a Discounted Gift Trust, the investor retains a right to take ‘income’ withdrawals but makes a gift of the balance of the investment. As the income right is retained, its value discounts the value of the gift; however, on the investor’s death, HMRC appear to accept that the income right has no value for inheritance tax purposes.
It is the possibility of discounting the size of the gift while not otherwise adding to the value of the investor’s estate which make a Discounted Gift Trust an attractive inheritance tax planning vehicle. In order for the planning to work, however, the retained right to income has to have a significant value. Where the investor is very elderly – such that the retained income flow is unlikely to last very long – this is difficult to establish.
In 2009 in RCC v Bower & Anor. STC 510, the High Court (overturning a special commissioners’ decision) held that the retained interest of a 90 year old investor was virtually worthless. One of key elements in that case was the lack of evidence to support a more significant value and in the more recent First-tier tribunal case of D M Watkins and C J Harvey (executors of K M Watkins deceased)published on 2 December 2011, the taxpayers made great efforts to avoid a similar conclusion by presenting arguments as to why, in the ‘open market’, someone would have paid more than a nominal amount for the retained interest. However, the case involved an 89 year old investor and the tribunal again found that as there was no realistic ‘open market’ for her interest, it should be given only a nominal value.
Although the case is, of course, significant in the context of Discounted Gift Trusts, it really only confirms the practical point that when dealing with a very elderly client, it will be difficult to establish any significant discount.
The case may also be of more general interest, however, as providing useful support to anyone arguing for a low inheritance tax valuation for other assets for which there is no obvious ‘open market’ in existence.
Latest HMRC Trusts & Estates Newsletter
The latest HMRC Trusts & Estate Newsletter was published on 21 December. As always, the newsletter is essential reading for anyone practising in these areas. Highlights include:
- Confirmation that HMRC now considers that no ‘double trust’ scheme is effective as an inheritance tax mitigation strategy – with the relevant published guidance in this area changed accordingly – as subject to the ‘gift with reservation of benefit’ (GWR) rules. A tribunal decision is expected on this point and, in the meantime, HMRC have confirmed that taxpayers who have previously been paying a Pre-Owned Assets Tax (POAT) charge in relation to such schemes should continue to do so (i.e. notwithstanding that no POAT charge would arise if, as HMRC suggest, there is a GWR).
- A new form – IHT 70 – has been issued for completion by any company claiming BPR on the establishment of an EBT. This follows HMRC’s concession in 2011 that, in the right circumstances, BPR could be available in relation to the creation of an EBT. There are currently no guidance notes available with the form which is disappointing because the issues around a BPR claim in such circumstances are not straightforward.
The creation of an EBT by a close company can give rise to chargeable transfers by the participators in the company and, in the absence of any other exemption (e.g. under s.10, 12 or 13 IHTA) the availability of BPR may be important in avoiding an immediate inheritance tax charge.
EC proposes measures to tackle cross-border inheritance tax problems
On 15 December 2011 the European Commission published a Communication, Recommendation and Working Paper on the problem of cross-border double taxation and cross-border discrimination in relation to inheritance taxes within the EU.
Currently, there is no uniform EU system for avoiding such double taxation and in the absence of treaty or unilateral relief, the same asset can be subject to tax in more than one jurisdiction. Likewise – contrary to the basic principles of non-discrimination and the free movement of capital – some Member States still operate inheritance tax rules which apply higher rates of tax to assets, deceaseds or heirs situated outside their territory.
The Commission will enter into discussions with Member States to ensure an appropriate follow up to their recommendations. The position will be reviewed in three years’ time to see whether the position has improved and further measures may, if necessary, be introduced.