Frequently asked questions
Why does L&G / LGII require that the lives assured on the DGS bond must be individuals other the donor / settlor and their spouse / RCP?
The provisions of the L&G & LGII Discounted Gift Scheme trusts describe the donor / settlor’s retained rights as the right to receive fixed, regular monetary amounts provided by means of partial surrenders of the Policy (the “Policy” being defined for L&G as the DGS Portfolio Bond and for LGII as the DGS International Portfolio Bond). It was felt that by structuring the retained rights in this way it would help prevent the trustees from taking any action with the trust fund i.e. the Policy, that might compromise the security of the donor / settlor’s retained rights and, in so doing, trigger a chargeable event. For example, surrendering the Policy in order to make a distribution to a trust beneficiary.
However, by structuring the scheme in this way but at the same timeallowing the donor / settlor &/or their spouse / RCP to be lives assured, it was felt that the scheme could fall foul of the anti-avoidance legislation contained in Para. 7 Sch.20 FA1986.
This legislation was introduced to expand the scope of the gift with reservation (GWR) provisions contained in FA1986/s.102 and was /is specifically aimed at IHT planning arrangements involving life policies. Para. 7 provides that:
A gift is to be treated as not to the donor’s entire exclusion – that is it will be a GWR – if:
- It is made on or after 18 March 1986 and
- The gift consists of or includes, or is made in connection with, an insurance policy on the life of the donor or his spouse or civil partner or on their joint lives, and
- The benefits which will or may accrue to the donee as a result of the gift vary by reference to the benefits accruing to the donor or his spouse or civil partner (or both of them) under this policy or under another policy (whether issued before, or at the same time, or afterwards).
Clearly under the terms of both the L&G & LGII DGS’s, the value of the benefits accruing to the beneficiaries will vary by reference to the cumulative value of retained rights payments that are paid to the donor / settlor until such time as those rights are no longer required to be satisfied.
It is worth noting that the actual legislation does not stipulate that the benefits enjoyed by both the donee and the donor or his spouse / RCP must be linked under the terms of the insurance contract(s) in order for an arrangement to fall foul of Para. 7. Given that most discounted gift trusts are likely to only hold a life policy whilst the donor / settlor’s rights remain to be satisfied, could it not be argued that the benefits accruing to the donee out of the gift will have been varied by reference to the benefits that accrued to the donor or his spouse or civil partner?In light of such a potential threat, our view is that a scheme structured in such a way as to avoid any possible Para. 7 challenge (by excluding the donor & spouse / RCP from being lives assured), offers valuable peace of mind.
