Taxbriefs Commentary Library

Discounted gift trusts – a word of warning

Brian Lawless, 28 Feb 2012


 

HM Revenue & Customs (HMRC) has won a new tax case on discounted gift trusts (DGT) about the level of discounts that should apply to a trust set up by an  elderly settlor.

The famous 2008 Bower (HMRC vs Bower) case involved a DGT effected by a woman in her 90s. The outcome was that only a very small discount was allowed; HMRC won the case at the High Court on the basis that no open market investor would have been available to buy the income stream selected because of the proposer's very advanced age. HMRC then issued Revenue and Customs Brief 21/09. The brief stated that HMRC is only prepared to allow a nominal value for the retained rights (the 'income') where the settlor is aged 90 or over at the date of transfer.

There has now been a new case, Watkins and Harvey v HMRC (2011), before the First-tier Tribunal. This case was decided on Bower principles also in favour of HMRC, but extended its application to people below the age of 90.

The interesting point is that Mrs Watkins was only 89 years old when she effected her DGT in 2004 for a purchase price of £340,000. She elected for an annual 'income stream' of 10% of the initial investment to establish the discount. She died some two years later in 2006.

HMRC estimated a discount of £4,250 should apply, on the principle that Mrs Watkins would not have been able to obtain life assurance. The executors appealed, arguing the discount should be £49,000, stating that the income stream would be saleable as it could be backed up by the collateral of other assets owned by Mrs. Watkins.

This case, therefore, seems to undermine the 'age 90' principle as stated in Brief 21/09. Two questions arise: Will the executors appeal the case? Will HMRC issue a revised Brief? We must wait and see.

This article appeared in the February 2012 edition of Financial Timesaver, the monthly newsletter for busy financial advisers.

 


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Brian Lawless

LLB (Hons), FCII, Dip PFS, TEP, Chartered Insurer

Brian worked for many years for Sun Life where he was managing director of Sun Life Technical Services Ltd., latterly AXA Technical Services - dealing with individual, trust and corporate tax planning. On retirement he then spent a further period as a consultant to AXA.

For two years, Brian was managing director of The Society of Financial Advisers (SOFA), the forerunner of the Personal Finance Society (PFS).

Brain currently does part time consultancy for Jelf Financial Planning (part of the Jelf Group plc). Brian also works as a taxation and trust consultant for various other organizations, including Taxbriefs Ltd. 

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