Discounted gift schemes

By Tolley
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The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Discounted gift schemes
  • Discounted gift schemes

Discounted gift schemes

These types of scheme are particularly suitable for those who have available liquid assets which can be realised without incurring any substantial tax liability (such as Capital Gains Tax). In essence, the money is transferred into the scheme with the tax payer retaining a right to a pre-determined series of cash payments during his or her lifetime. Whatever else remains in the scheme at the time of his death is given away at the outset to his or her children or grandchildren or other beneficiaries. Therefore, there is a lifetime gift to those beneficiaries but the value of it is discounted to take account of the value of the right retained by the tax payer.

The schemes are usually operated by life insurance companies with the funds invested in a single premium investment bond. This structure is ideal for an arrangement where the pre-established return is to be paid back to the person setting up the scheme, because the legislation relating to single premium bonds permits up to 5% of the initial premium paid to be withdrawn tax free each year for 20 years (a return of capital).

The schemes are normally suitable for those who are over retirement age, but not over

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