Discounted Gift Trust

A trust is a way of managing assets (such as money or investments). It is a legal arrangement where someone (the settlor) puts some assets into a trust and appoints a person or group of people (the trustees) to look after the assets for the benefit of a person or group of people (the beneficiaries). There are different types of trusts which have different features and benefits.

This trust could be ideal for those looking for inheritance tax planning and a fixed, regular income. After seven years, the value of the gift moves out of your estate, so there won’t be any inheritance tax to pay on it. Any growth on the investment is outside of your estate from day one.

Decide the level of payments

With this trust, you’ll first need to take out one of our investment bonds. At the same time, you’ll need to choose the level of regular payments you’d like to receive for the rest of your life. These regular payments cannot be changed.

With a discounted gift trust, you can receive fixed regular payments made from the investment.

This trust is only suitable if you’re certain that you’ll need these fixed regular payments for life and don’t need access to the capital. If you don’t need fixed regular payments, or want to take ad hoc payments, this trust might not be suitable for you.

Calculating the discount

Based on your life expectancy, we work out the expected value of providing those regular payments. This amount is immediately outside of your estate (the discounted part), which could give you an immediate reduction in inheritance tax.

Placing the bond in trust

The investment bond is then transferred into trust with the rest of the investment being treated as a gift, which will be outside your estate after seven years. Any growth is outside of your estate from day one.

Bare Discounted Gift Trust

With this option, you can’t change the beneficiary at a later date, so you’ll need to be certain about who you choose. The trustees will manage the investment for you and for the named beneficiary after your death. Once the beneficiary is 18, they can manage the investment themselves.

Discretionary Discounted Gift Trust

With this option, you state a class of beneficiaries such as ‘my children’ or ‘my grandchildren.’ The trustees can decide after your death who’ll benefit from the trust and when.

Products that can be placed in this trust

Premiere and Premiere Europe accounts                                                   

Delta Account

Income Tax

When money is withdrawn from an investment bond in a discounted gift trust, income tax might need to be paid. The person who needs to pay the income tax depends on whether the trust is bare or discretionary. For a discretionary trust, it also depends on whether the settlor is still alive.

Inheritance Tax

A discounted gift trust could immediately reduce the value of your estate for inheritance tax, as part of the investment may be outside your estate immediately.

Once the investment’s been in the trust for seven years, the amount gifted is totally outside of your estate and you won’t need to pay inheritance tax on it.

This summary is based on our understanding of applicable legislation, law and current HMRC practice. It is provided solely for general consideration. We suggest that you seek your own independent tax advice.

 

Settlor/Donor Medical Questionnaire Premiere/Premiere Europe Account Application Form Delta Account Application Form Bare Trust Deed - Discounted Gift Trust

Discretionary Trust Deed - Discounted Gift Trust Technical Guide - Discounted Gift Trust Trust Support Guide - Discounted Gift Trust

About Kate
Kate gets an income of £30,000 a year from her pension. She recently sold her house and has moved into rented sheltered housing.  Kate has £600,000 in savings.

The fees for Kate’s retirement apartment are £28,000 a year and she’s concerned that if her health gets worse, she might also need to pay for extra care.

Kate’s goals
Kate wants to make sure that she has enough income to pay for her rent and potential care fees, now and in the future. Kate would also like to reduce any potential inheritance tax, so that she can leave as much as she can to her family and favourite charity

A discretionary Discounted Gift Trust
With the help of an adviser, Kate decides to put £250,000 into a discretionary Discounted Gift Trust. This allows her to receive fixed regular payments, lets her choose her potential beneficiaries and reduce the amount of inheritance tax that her estate might have to pay.

How the payments work
As part of the Discounted Gift Trust arrangement, Kate has the right to fixed, regular payments for the rest of her life. The lump sum (or capitalised) value of this right is not a gift for inheritance tax purposes. This is known as the discount.  The payment stream will stop when she dies or when the fund is exhausted. The amount of discount she gets will depend on factors such as her age, life expectancy, lifestyle choices, health and the amount of the fixed, regular payments she choses.

Calculating the discount
Kate is in fairly good health, so she receives a discount of £93,750, which is immediately outside of her estate for inheritance tax purposes. The remaining £156,250 is classed as a gift into the discretionary trust and will fall outside of her estate after seven years. Kate receives a fixed yearly payment of £7,500, which helps to pay for her care. She keeps £350,000 as an emergency fund to pay for any future care costs.

An income boost and a secure inheritance
Kate has the peace of mind knowing that she can now comfortably manage her budget. She will receive a regular yearly payment on top of her pension which gives her a sufficient income to cover her current needs. It also provides her a little extra to cover any unexpected expenditure. She gets an immediate discount for inheritance tax purposes, and she also knows that all the growth on her £250,000 investment will be outside her estate from day one.

In addition, after Kate’s death, the use of a discretionary trust allows the trustees to distribute the proceeds to the beneficiaries that Kate’s chosen, as they see fit.

What are the risks?
The value of your investment can go down as well as up and you may get back less than you invest. The way investments performed in the past is not a guide to how they’ll perform in the future. Tax rules depend on individual circumstances and may change. Speak to an adviser for more information on tax.

This case study is based on our understanding of applicable legislation, law and current HMRC practice. It is provided solely for general consideration. We suggest that you seek your own independent tax advice.