Standard Life welcomes HMRC initiative on discount standards for Discounted Gift Trusts

Standard Life has welcomed the HM Revenue and Customs ("HMRC") initiative to document clear technical standards for how discounts are calculated with Discounted Gift Trusts ("DGT").

A Technical Note was published on the HMRC website today.

The detailed note runs to 5 pages.

A number of specific points about the preferred HMRC methodology are covered in the Technical Note including : 1.

the mortality table preferred by HMRC; 2.

interest rate assumptions; 3.

open market purchaser's costs of 3% (which are a deduction); 4.

the approach to joint settlor trusts (typically husband and wife or civil partner trusts); 5.

the maximum age of entry, stated to be 90 next birthday.

Historically, life companies each developed their own approach to the methodology for calculating discounts, sometimes in consultation with HMRC although there was no obligation to discuss methodology with HMRC.

This resulted in some wide variations in the quoted levels of discounts from different providers.

The new basis for calculating discounts will result in lower discount figures.

Commenting on this development Julie Hutchison, Estate Planning Specialist at Standard Life Assurance Limited, said "This is something Standard Life called for back in October 2005, but at that time there was no appetite for it".

"Since Budget 2006 and the expansion of the chargeable transfer regime to gifts to DGT's, there has been a greater need for clarity on valuation issues".

"The HMRC initiative tackles this head on".

"I welcome the greater transparency and consistency this Technical Note will bring." The new technical standards come into force on 1 June 2007, with one exception.

The one exception involves the change to the joint settlor methodology, which will mean the new rules will be applied to a handful of existing DGTs.

Historically there were two different approaches to dealing with joint settlor trusts.

One involved sharing the discount on a 50/50 basis between spouses or civil partners.

HMRC now wants to move away from this approach to one which involves more individual discounts to tie-in with the health and life expectancy of the individuals.

This does not mean that all existing DGTs done on a 50/50 basis will be challenged by HMRC however.

In the HMRC Technical Note it is stated that retrospectivity will only occur where the 50/50 approach "would provide an unreasonable valuation of the settlor's retained rights and substantial sums are involved." Julie continued "We are aware that HMRC is drawing a line in the sand as at 1 June, with one limited exception".

"We are identifying whether we have any historic joint settlor cases which could be affected and will be contacting advisers with new information for clients in those cases".

"This is likely to involve the issuing of a new Discount Certificate in a very small number of cases".

"The reason the affected group will be small is that for HMRC to be interested in challenging a case it probably needs to be a gift of such a high value that it could involve an inheritance tax ("IHT") liability either on death or during lifetime with an initial 20% IHT liability".

"This could be the type of gift HMRC refers to in its Technical Note as a "substantial sum"".

"Realistically this probably means that the gross gift values involved would be in excess of the nil-rate band for IHT.

The nil-rate band was ?275,000 in our year of launch (2005)".

"For joint settler cases, I would interpret a "substantial sum" to be, for example, higher than twice the nil-rate band ie".

"above ?550,000 in 2005 figures." Julie concluded "HMRC consulted the ABI whilst developing its Technical Note".

"This positive engagement with the financial services industry is a good example of how to avoid chaos when implementing change".

"However it is disappointing that these changes might retrospectively affect some existing policies.".

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