Discounted Gift Trusts and IHT

A Discounted Gift Trust (DGT) allows you to move money outside of your estate for Inheritance Tax purposes while continuing to receive a regular income from the investment. For some people, this can provide the best of both worlds: reducing a future tax liability while maintaining financial independence.

A Discounted Gift Trust is a specialist estate planning tool designed to help reduce the value of your taxable estate.

You place a lump sum into a trust, typically invested through an investment bond. At the same time, you retain the right to receive regular withdrawals for the rest of your life, or until the fund is exhausted.

These payments are usually set at a fixed amount when the trust is established and cannot normally be changed later.

The key benefit is that part of the gift may immediately fall outside your estate for Inheritance Tax purposes, potentially reducing the tax payable when you pass away.

When you set up the trust:

• You invest a lump sum.
• You choose a regular withdrawal amount.
• The investment is placed into a trust for your chosen beneficiaries.
• You retain the right to receive fixed withdrawals from the investment.

When you die, any money remaining within the trust can pass directly to your beneficiaries without the delays associated with probate.

You can also decide who benefits from the trust and, in some cases, set guidelines on how and when funds are distributed.

The ‘discount’ is what makes this trust unique.

Because you retain the right to receive regular payments throughout your lifetime, not all of the money you place into the trust is treated as a gift immediately.

Actuaries calculate the value of your future withdrawals based on factors such as:

• Your age
• Your health
• The amount of withdrawals you choose

This retained benefit is known as the discount.

The discounted portion is effectively excluded from your estate immediately, creating an immediate Inheritance Tax advantage.

The remaining value of the gift may also leave your estate if you survive for seven years after making the gift.

Additionally, any future growth of the investments held within the trust is generally outside your estate for Inheritance Tax purposes.

Normally, gifts made into trust are subject to the seven-year rule.

If you die within seven years of making the gift, some or all of the value may still be considered part of your estate for Inheritance Tax calculations.

However, Discounted Gift Trusts can still offer an advantage.

Even if you die within seven years, the initial discount may still apply. This means a portion of the money may remain outside your estate, potentially reducing the overall tax liability.

The size of the discount depends on your circumstances. Generally speaking, younger and healthier individuals may receive a larger discount because they are expected to receive withdrawals for a longer period.

A Discounted Gift Trust may be suitable for people who:

• Have concerns about future Inheritance Tax liabilities.
• Have surplus capital they can afford to commit.
• Want to leave more wealth to their beneficiaries.
• Still require a reliable income stream from their assets.
• Do not need flexible access to large lump sums in the future.

Many people consider these trusts in later life, often in their seventies or eighties, although suitability depends entirely on individual circumstances.

While these trusts can be highly effective, they are not right for everyone.

You should think carefully before proceeding because:

Once established, the withdrawal amount usually cannot be increased or decreased. If your financial needs change, you may have limited flexibility.

Although your withdrawals remain the same, the cost of living may increase over time, reducing the real value of the income you receive.

The value of the trust depends on the performance of the underlying investments. Poor performance could reduce the amount eventually available for beneficiaries.

If you later need a large lump sum, you cannot simply withdraw money from the trust as you no longer own those assets directly.

Discounted Gift Trusts are complex estate planning arrangements that require careful consideration.

Before establishing a trust, it is important to understand:

• Your current and future income requirements.
• The potential Inheritance Tax savings.
• The impact on your beneficiaries.
• Investment risks.
• Alternative estate planning strategies that may be more suitable.

A regulated financial adviser can help determine whether a Discounted Gift Trust aligns with your long-term financial and estate planning objectives.

For individuals looking to reduce Inheritance Tax while retaining a reliable income, a Discounted Gift Trust can be a valuable estate planning solution.

It offers a way to move wealth outside your estate, potentially reduce future tax liabilities, and maintain financial security throughout retirement. However, the trade-off is a loss of flexibility, which means careful planning and professional advice are essential.

If you would like guidance on Inheritance Tax planning, trusts, or wider estate planning strategies, we are here to help ensure the most appropriate solution is chosen for your circumstances.

Call us on 01384 376 964.

Folkes Worton LLP Chartered Accountants
Accounting for the Future