Discounted gift schemes can help save inheritance tax
Current Issues | Tax | 1st August 2016
These investment products can be helpful when planning for passing on your estate.
Discounted gift schemes involve a single premium life insurance policy usually known as an 'investment bond'. You choose a fixed percentage of your initial investment to be withdrawn from the bond each year for the rest of your life.
The bond's value is therefore discounted by reference to the actuarial value of the right you retain to future withdrawals. The 'discounted' bond can then be given away to someone or to a discretionary trust, who will get the proceeds from the bond when you die. At this point there may be an income tax liability, based on comparing the value of the bond at that time with the amount originally invested, taking withdrawals into account.
If the 'discounted' bond is given away outright, for example to your children, there is usually no inheritance liability unless you die within seven years. If the bond is given to a trust the transfer will have inheritance tax implications. If its value exceeds any unused nil-rate band, there is likely to be an immediate inheritance tax liability, at 20% of the value of that excess, with further tax due if you die within seven years. Within the trust there may be inheritance tax payable on exits and every ten years.
Overall, while there may be potential inheritance tax savings as a result of making a lifetime gift, those considering them should be aware that they involve the purchase of an investment product.
Specific advice should be obtained before taking action, or refraining from taking action, on the basis of this information.