IHTM20655 - Life Policies: Technical note on discounted gift schemes issued on 1 May 2007: underwriting approach

Where discounted gift scheme (DGS) contracts are concerned, insurance companies adopt differing practices with regard to underwriting the settlor’s life. These range from no underwriting through the so-called ‘sealed-envelope’ to full underwriting. HMRC’s preference is that full underwriting should be carried out before the DGS is effected.

The open-market based valuation method requires that evidence of the settlor’s health exists at the transfer date that is sufficient for the settlor’s life to be underwritten to the standards required for whole of life assurance. If no evidence of health has been obtained at the outset, HMRC take the view that a discount is not justified unless medical evidence sufficient to underwrite the settlor’s life to the standards required for whole of life assurance was already in existence and can be produced, should it be necessary to quantify the gift at a later date.

HMRC adopt this stance because problems can and do arise if no evidence of health has been obtained at the outset and therefore is not reflected in the estimate of the value of the gift. On the death of a settlor, for example, where no evidence has been obtained we will often need to ask the settlor’s personal representatives to obtain evidence about the settlor’s health at the time the gift was made. This is undesirable as the surviving family may face intrusive and upsetting enquiries at a difficult time and can be avoided if the information is obtained in advance. Problems also arise where medical evidence is not collected until after the transfer occurs and it then becomes apparent that up to date medical details are not held. This would be insufficient evidence on which to underwrite to the standards required for whole of life assurance and would therefore result in no discount. Additionally survivors may not have been party to the transaction entered into by the settlor. They may feel entitled to particular treatment based on expectations given by financial advisors and then feel aggrieved when we begin investigating.