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Discounted Gift Trust

A discounted gift trust (DGT) is a trust based inheritance tax (IHT) planning arrangement for those who wish to undertake inheritance tax planning but also need an income.

Features

  • Immediate IHT discount
  • Further IHT saving (up to full 40%) over 7y
  • Money remains invested in line with risk preferences
  • Keep control over money and eventual beneficiary(ies)
  • Will provide a regular income with deferred tax
Limitations

  • Trust set up is semi-complicated
  • Investment amount usually limited to Nil Rate Band
  • Income amount is not adjustable
  • Must survive for 7y on non-discounted portion

The gifting of a lump sum into a trust whilst retaining a lifelong ‘income’…

It allows the gifting of a lump sum into a trust whilst retaining a lifelong ‘income’ from that money (technically withdrawals of capital), with the objective aim of reducing the eventual IHT payable on death.

The income being withdrawal of capital means that as long as regular withdrawals are no more than 5% of the original investment and the total amount withdrawn in your lifetime is not more than 100% of the original investment there will be no immediate liability to income tax. If, or when, the limits are exceeded then a tax charge may apply.

Traffic light comparison

AccessSpeedSimpleControlCost
Gifting
Whole of Life
Loan Trust
Discounted Gift Trust
Flexible Reversionary Trust
Business Property Relief
How each of the solutions fare in relation to these issues is indicated above using a traffic light system; green being the most favourable.

Please note: this graphic is subjective to change, not every expert will agree on the distribution of colours. There is much more to know before you act and that you should always seek financial advice first.

The calculation is made as to the likely total amount of ‘income’…

Furthermore, provided the investor is in reasonable health, a calculation is made as to the likely total amount of ‘income’ that will be paid during their lifetime.

The likely total income is given a capital value, normally known as the “discount” and is said to be retained by the client.

In the event of the investor’s death, this “discount” should in theory be returned to their estate and assessed for IHT. However, the accepted IHT treatment, as has been tested many times and accepted by HMRC, is that this right to an income for life has no value once the settlor has died, and therefore no money has to be returned.

The effect is that the discount is deemed to leave their estate on day one providing an immediate IHT benefit.

The possibility of an immediate IHT saving while retaining access to an income stream is extremely attractive.

TAKE CARE 1
This investment / gift to trust is a CLT (Chargeable Lifetime Transfer) and if this gift, including the value (excluding the discount) of other (non-exempt) gifts within the previous 7 years, is more then than the NRB (Nil Rate Band), then an initial tax charge will apply. A tax charge may also apply on withdrawals or on every 10th anniversary if the value exceeds the NRB.
TAKE CARE 2
The amount of the discount will depend on the amount of the income and the age of the settlor. It is important to have the discount underwritten before making the gift as when you die HMRC will investigate each case where a discount is claimed on the estate to ensure it is apt given the settlor’s health at the time.

Discounted Gift Trusts for IHT Planning (in practice)…

In practice this is a very useful tool because most of us still want an income from our investments in later life.

That income provides security, of course and those few extra luxuries that will your retirement special. An extra holiday, more extravagant gifts for your grandchildren or whatever it might be.

For a higher rate tax payer, the form the income takes is particularly useful as you will not initially be paying income tax. To put this in to perspective, for a 40% tax payer, every £1,000 is worth £1,667 of bank interest.

However, care should be taken, because the income is for your lifetime and is not flexible. If you are not spending the income, then you are simply transferring wealth back in to your taxable estate and undoing the good work of using the DGT in the first place.

Additionally, the discount, whilst pleasing, is not going to be a discount if you live as long as actuaries would expect you to, so can largely be disregarded.

As you can see, there are good and bad points to the DGT. At the end of the day it boils down to this…

If you would like to keep receiving and spending income from your investments and would also like to move the capital out of your estate to reduce IHT, then the DGT could be suitable.

It might be as near as you will get to having your cake and eating it.

Those lucky enough not to need that extra income may be more suited to a Flexible Reversionary Trust where the money drawn from the investment is optional. Or straight gifting.

IHT Planning is best dealt with holistically, taking into account all of your finances and goals

We have many years of experience in advising clients across the country who wish to use legal processes to protect their estate, and we provide a tailored service for each individual. Our company is well qualified to answer questions and enable you to organise your assets.

If you have any questions or queries call us on: 0800 093 4115

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