Pre-owned assets: insurance based products: discounted gift trust
A discounted gift trust or plan is where the settlor makes a gift into settlement with certain ‘rights’ being retained by them. The retained rights may, for example, be a series of single premium policies maturing (usually) on successive anniversaries of the initial investment or on survival, reverting to the settlor, if they are alive on the maturity date; or the settlor carves out the right to receive future capital payments if they are alive at each prospective payment date. The gift with reservation provisions do not apply.
In the straightforward case where the settlor has retained a right to an annual income or to a reversion under arrangements, that right is not property within FA04/Sch15/Para8 as the trustees hold it on bare trust for the settlor. A bare trust is not a settlement for inheritance tax purposes (IHTM16030). The settlor is excluded from other benefits under the policy and so the POA charge does not apply.
There may be more complex cases where the settlor’s retained rights or interests are themselves held on trust. But that would normally be construed as being a separate trust of those benefits in which the settlor had an interest in possession. No POA charge will arise where the interest in possession arose before 22 March 2006 by virtue of FA04/Sch15/Para11(1) (IHTM44041).
Where, however, the POA charge does arise, it will be by reference to the value of the rights held on trust for the settlor, not by reference to the value of the underlying life policy. An open market value of those rights will need to be obtained in order to calculate the charge (IHTM44025).