Can a Settlor be uninsurable and still get a discount on a Discounted Gift Trust?
It is a commonly held belief that if a Settlors’ life is considered uninsurable a discount would not be given on application for a Discounted Gift Trust (DGT). It has long been held that someone aged 90 years is ‘automatically’ uninsurable and so a discount would not be granted at all. Indeed I can remember an exam question along these same lines!
Mrs Bower died 5 months after making a gift to a DGT with a declared discount of £7,800. A key issue was that Mrs Bower was aged 90 at the point she made the gift to the trust. The point of contention related to the value of the lifetime gift made by Mrs Bower, when she set up the DGT. HMRCs’ initial view was that someone aged 90 or over would receive little or no discount since someone of that age would be uninsurable. The executors of the late Mrs Bower countered this position arguing that a discount could apply. However, in its Notice of Determination issued to the executors HMRC revised the valuation to £250.
The Special Commissioner accepted the argument put forward by HMRC that the valuation initially calculated by the underwriter would be reduced by a prospective buyer in order to provide for purchasing expenses such as medical opinions and legal expenses. It was also accepted that Mrs Bower was uninsurable and that the purchaser would not be able to obtain life cover to guard against the mortality risk of such a purchase.
The Special Commissioner however, decided that a discount still ought to apply as it was decided there still might be buyers of the right to income for a figure in excess of the nominal £250 arrived at by HMRC.
The Commissioner stated “I must judge whether speculators might have paid more than £250 for the ‘right to income’ in this case, the first person who I believe would have been a willing purchaser at the increased price of say £300 is myself, someone who has never placed a bet on anything in his life and is fairly risk-averse.
“However, offered the possibility of buying this life annuity for £300, anyone would have made the simple calculations that, had Mrs Bower lived for one month until January 2003, one would have made a profit of £4.16, and that were she to live for the projected 30 months, on would make a profit of £8,820.
“The resultant risk/ reward ratio would seem to have been extraordinarily attractive. Many would take the view that there was no real need to worry about medical advice, and I would have been perfectly comfortable to write out an assignment and ask Mrs Bower to sign it in the presence of a witness without bothering, with only £300 at risk, to seek legal advice. I would then have given Axa Isle of Man notice of the assignment and hoped that she would have survived for a long time. As it was, of course, she died when only four annuity payments would have been received, so that I would have been unfortunate to recover my outlay and only make a profit of slightly more than 300%.”
HMRC’s figure of £250 was therefore rejected and the Commissioner ended up settling on a figure of £4,200. The Commissioner did make it quite clear however, that this was not a test case and that each case and his judgement would not necessarily be applied to similar cases.
HMRC has now given notice of appeal to the High Court against the decision and has issued a special briefing setting out how it intends dealing with similar cases www.hmrc.gov.uk/briefs/inheritance-tax/brief2308.htm of course these intentions are dependant on the outcome of the appeal.
Conclusion
Whilst the Bower vs. HMRC case highlights some concerns for the uninsurable and particularly those over age 90 years it does highlight the fact that HMRC consider DGTs to be valid and acceptable. Given that we are going through a period where HMRC are cracking down on all forms of anti-avoidance this should provide considerable confidence!