A recent case considered whether an Inheritance Tax saving scheme

purchased by a very elderly lady could succeed. The Taxman won leaving

the executors to pick up the tax bill and the scheme fees. What was

the problem?

 

A workable idea

 

The case of CRC v Bower and other (executors of Bower (deceased)

involved a dispute over a scheme, which centred on the making of a

gift via a trust. Usually you would have to survive seven years from the

date of making a gift before it becomes exempt from IHT. But a Discount

Gift Scheme (DGS) can be used to immediately reduce the value

of someone’s estate. What are the other benefits of a DGS?

 

Part income, part gift

 

These schemes are popular with those who can afford to give away

relatively large sums and want the certainty that some of the gift will

escape IHT. A DGS also pays the purchaser a regular income. These

factors were probably in the minds of Mrs Bower (B) and her family when

she paid £73,000 for a DGS. What went wrong?

 

How it works

 

The money paid for the DGS is gifted into a trust for beneficiaries chosen by the scheme purchaser. On its own this would be a gift subject to the normal IHT rules, i.e the donor must survive seven years for it to be exempt. But some of the money is earmarked to be paid back to the scheme purchaser as a regular income. This amount is obviously not a gift as they’re getting the money back. So it can be ‘discounted’, i.e. it won’t count as a gift. But the income is only payable for as long as the purchaser is alive. And it’s not possible to put an exact value on this at the time the scheme is set up; who knows how long the purchaser will live? This is where the insurance experts step in. they make this type of life expectancy questimate all the time. So they’ll put a capital value on the income element of the DGS which is then treated as immediately deducted from the value of the gift for IHT purposes. But there’s still a final hurdle to clear.

 

The problem is

 

Usually, an insurer will underwrite their risk by spreading the potential cost of paying out more than they bargained for. Effectively, they take out life insurance on the DGS purchaser. It’s this last step that the Taxman says is vital to the scheme’s IHT success. So where did that leave B?

 

 

Age discrimination

 

The problem, according to the Taxman, was that B was too old when she took out the scheme. In his view no company would be prepared to insure her life. So even though she actually received some of her money back in the form of income payments, this could not be deducted form the value of the original gift under the scheme. IHT was therefore due on the full value of the gift. The judge agreed.

 

Tip 1

 

If you’re in good health and no more than around 85 years of age, a DGS can immediately exempt some of your estate from IHT. As you’ll be charged a commission, typically between 5% and 10% of the amount you put into the scheme, shop around to get the best deal.

 

Tip 2

 

To make sure that a DGS works, check with the insurance company whether they intend to, or believe they could, underwrite the risk.