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HMRC internal manual

Inheritance Tax Manual

Life Policies: Pure Endowment policy linked with a Term Assurance policy: Discounted Gift Schemes: introduction

As the name implies, Discounted Gift Schemes involve a ‘gift’, or more accurately a transfer of value, being made by the person taking out the scheme. The scheme essentially involves the gift of a bond from which a set of rights are retained by the transferor, usually the right to predetermined withdrawals or to a series of successively maturing reversions. The value transferred takes into account the open market value of these retained rights so the value transferred is often less than the single premium paid. The difference between the value transferred and the amount of the premium paid is often referred to as a ‘discount’, so the generic name ‘Discounted Gift Scheme’ is given to these arrangements. Further details can be found at IHTM20424.

Before 22 March 2006 these transfers of value were normally potentially exempt transfers (IHTM04057), but following the changes in the Finance Act 2006 a considerable proportion of these transfers are now immediately chargeable transfers (IHTM04067). So you may need to consider the value transferred at the time of the transfer or following the transferor’s death within seven years. Investigation into the effectiveness of the plan and establishing the value transferred is for the Actuarial Team and all cases should be referred to that Team when you have received the information set out at IHTM20422

The basic scheme is set out at IHTM20424.