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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

  • Potential Immediate IHT discount
  • Further IHT saving (up to full 40%) after 7y
  • Money remains invested
  • Keep control over money and eventual beneficiary(ies)
  • Will provide regular payments 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
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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capital means that as long as regular withdrawals are no more than 5% of the original investment and the total amount withdrawn in your lifetime is not more than 100% of the original investment there will be no immediate liability to income tax.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 could be 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 (the product provider will do this) 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.
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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.

For some, that income provides security and helps pay necessary bills and costs. For others, it is an extra income for those few extra lifestyle choices that could make your retirement special: an extra holiday, more extravagant gifts for your grandchildren or whatever it might be.

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.

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.

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 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.

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