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 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 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
Kate keeps the right to get fixed, regular payments. The part of the investment that secures this right is not a gift for inheritance tax purposes. This means that she is exchanging a lump sum for an income stream – known as the discount. This 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 income she needs.
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 and 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.
