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Case study: Making the most of gender specific pricing with discounted gift trusts

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The problem: A married couple are considering some inheritance tax planning. Following your advice they would like to utilise a discounted gift trust. However, they have read about HMRC’s updated guidance, issued on 6 August, regarding the calculation of discounts for such trusts and have asked for more information. 

The solution: Discounted gift trusts work where the value of the gift made in to a trust is “discounted” by the retained rights the settlor has to receive withdrawals during their lifetime. The discount is calculated using actuarial principles. HMRC has previously issued guidance on how to calculate the discount. For example, it confirmed which mortality tables should be used and the interest rate and expense assumptions. 

When the gender directive was introduced, there was a lot of debate about what effect, if any, it would have on the calculation of the discount on DGTs. At the time HM Revenue & Customs  agreed that as the discount is based on the rate an open market purchaser would pay in the market, it was not necessary to move from gender specific mortality rates to gender-neutral ones.  

The insurance company that your clients have chosen has provided an indication of the discount that your clients may achieve. Both clients are in good health and following recent birthdays are both 68.  Based on individual investments of £500,000, with 5 per cent monthly withdrawals, the following illustrative quotes have been provided: 

 
Value of gift Value of interest retained Value of discounted gift
Male £240,308 £259,692
Female £280,391 £219,609

However, HMRC has now updated this guidance to confirm there will be a move to gender-neutral rates from 1 December. It has also reduced the interest rate assumptions from 5.25 per cent to 4.5 per cent, which will apply from 1 December. 

The table below provides an illustration of what this change will mean to the calculation. This assumes the same age and health for each client –  the only variable factor is their gender.

 
Discount Gender specific rate Gender neutral rates
Male Discount will be less than female Discount will be unchanged
  due to life expectancy  
Female Discount will be greater than male Discount will be the same
  due to life expectancy as male (i.e less)           

A female client who is considering a DGT will, prior to 1 December where gender specific rates are used, receive a greater discount if they act now. This may result in a larger inheritance tax saving. 

For example, assuming the value of the DGT for a female is £219,609, after December 1 the value of the female discount may move to where the male discounts are, which is £259,692 – not allowing for the change in interest rate. This creates a difference in value of £40,083, which would create an IHT saving of £16,033. But only if the female client were to act now. 

However, this gender specific pricing advantage will not last forever and the client will be subject to the gender neutral rates at the 10-year anniversary. This follows HMRC clarifying the approach that trustees should undertake on relevant property trusts (i.e. discretionary and interest in possession) at the 10-year anniversary. 

When preparing the 10-year calculation, the triustees are able to add another 10 years to the initial underwritten value. HMRC has confirmed that it will not look to review this valuation unless the settlor dies within two years of the 10-year anniversary. 

HMRC believes this is a ‘practical approach’ to the valuation, as it places the minimum administration burden on the trustees, while still allowing some certainty on the value. 

Unlike new DGTs that will be introduced from 1 December, it is possible for the trustees to use either gender neutral or continue with gender specific rates for relevant property trusts. 

DGTs remain a suitable solution for clients looking to mitigate their inheritance tax bill. However, it is imperative that the settlors and trustees keep an eye on HMRC guidance to ensure any discount applied is calculated in the correct way and reported accordingly. 

Rachael Griffin is head of technical marketing at Skandia 

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