Life Policies: Technical note on discounted gift schemes issued on 1 May 2007: Inheritance Tax treatment of discounted gift schemes.
Essentially a discounted gift scheme involves a gift of a bond from which a set of rights are retained, typically withdrawals or a set of successively maturing reversions. The retained rights are sufficiently well defined to prevent the gift being regarded as a gift with reservation (GWR) for Inheritance Tax (IHT) purposes.
The gift is a transfer of value for IHT purposes. The value of the gift is determined by the loss to the estate principle set out in IHTA84/S3(1), and quantified by:
- the difference between the amount invested by the settlor and
- the open market value of the retained rights (IHTA84/S160).