IHTM20653 - Life Policies: Technical note on discounted gift schemes issued on 1 May 2007: valuation issues

The open market value (OMV) of the retained rights in a discounted gift scheme will depend on a number of factors including the settlor’s gender, age, health and thereby insurability, as at the date of gift. If the settlor was uninsurable, for any reason, as at the gift date the OMV of the retained rights would be nominal and the gift would be close to the whole amount invested by the settlor. This is because IHTA84/S160 provides that, in valuing the retained rights, we assume that a sale of them takes place.

The logic behind that premise is based upon sound open market evidence and fully endorsed by leading counsel from whom HMRC has taken advice. We have looked for evidence to sales of assets similar in nature to the retained rights, for example life interests or contingent reversions which are dependent upon the survival of the relevant life to a series of predetermined dates. This indicates that such rights are not saleable unless life assurance can be effected on that life by the open market purchaser (OMP) or it comes as part of the sale. If it cannot be effected market evidence shows that those assets will not sell. Without life cover in place the OMP is at risk of anything up to the total loss of their investment should the settlor die early. HMRC consider it to be fundamental that the open market valuation of the retained rights should be carried out having regard to what market evidence is available. We have been unable to find any evidence that it is possible to effect cover on lives older than 90 next birthday. So we regard lives older than that, true or equivalent (mortality rated), as being uninsurable, so the gift value will be nominal.