Change to the valuation rate of interest used for discounted gift schemes
Published 17 April 2023
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Purpose of this brief
The purpose of this brief is to give notice that the valuation rate of interest used by HMRC in valuing the retained rights under discounted gift schemes will increase from 4.5 per cent per annum to 6.75 per cent per annum with effect from 1 May 2023.
Who needs to read this
If you are a provider of discounted gift schemes, or otherwise provide advice on the valuation of the retained rights under these schemes.
Background
Discounted gift schemes are an inheritance tax planning arrangement where the investor or investors place a bond or policy into trust, retaining the right to receive a specified level of withdrawals or policy maturities for the remainder of their life or lives.
There is a transfer of value when a person enters into a discounted gift scheme and this transfer is quantified as the difference between the amount invested, and the open market value of the retained rights.
The open market value of the retained rights is, in accordance with section 160 Inheritance Tax Act 1984 (‘IHTA84’), the price which the asset may fetch if sold in the open market.
The retained rights are payable to the settlor or settlors of the arrangement for the remainder of their life or lives.
Open market purchasers will not buy such payment streams unless they can insure the life or lives on which the payments depend.
If the life or lives in question can be insured, an open market purchaser will then decide what level of return they require to make the investment worthwhile.
The current interest rate used by HMRC in valuing these retained rights is an interest rate of 4.5 per cent per annum. This was set in December 2013.
Yields on medium to long-term gilts have increased over the last year. In addition, the Bank of England has increased interest rates to 4.25 percent now.
Given the economic position in HMRC’s view an investor purchasing a payment stream payable on the life of an individual will require a greater return on their investment than the 4.5 per cent per annum currently being used in these valuations.
As a result HMRC will increase the interest rate applicable to valuing the retained rights from discounted gift schemes to 6.75% with effect from 1 May 2023.
This change applies to valuing the retained rights both at the inception of a discounted gift scheme, and at any ten-year anniversary which falls on or after 1 May 2023.