Discounted gift trusts explained

Inheritance tax is often in the news, normally when it is announced how much HMRC has received in the most recent tax year!

There are many options available to individuals worried about their IHT liability, but some are put off due to, in most cases, the need to lose an aspect of control over their money. One option that can help with this is Discounted Gift Trust (DGT). 

A Discounted Gift Trust is an arrangement that allows an individual to gift a sum of money yet retain the right to receive an income from it, usually 5% per annum as this takes advantage of the 5% tax deferred withdrawal facility under an investment bond.  Once the income level is agreed and set it is irrevocable and therefore cannot be changed in the future.  The actual gift goes into a trust for the individual’s chosen beneficiary or beneficiaries.

This type of arrangement is called a Discounted Gift Trust because the value of the Gift may be discounted for Inheritance Tax purposes, with immediate effect.

The insurance company will decide what discount is to be given based on factors including an individual’s health and age; therefore, the younger and fitter you are, generally the higher discount.  To provide an example: if Mr Jones, who is 63 years old and in good health, invested £200,000 and requested income at 5% per annum, the insurance company may value the initial discount at £110,000, leaving a gift of £90,000.  This would mean that £110,000 would be outside Mr Jones estate immediately and, should Mr Jones survive for a full seven years after the original gift, the remaining gift, together with any growth on the investment, will be outside Mr Jones’ estate for inheritance tax purposes.  The whole value of the investment bond will be held within the trust, but the amount of regular withdrawals paid to Mr Jones will continue beyond the seven years.

A Discounted Gift Trust is not suitable for everyone but assuming you are in good health, likely to live seven years and require an income from the investment, this could be an excellent way of mitigating inheritance tax.

As stated earlier, the investment would be made to an investment bond.  Our financial advisers would make a recommendation on the funds to be invested into this arrangement, taking into account your attitude to risk and your existing financial arrangements.

We are pleased to offer a free initial meeting of up to 30 minutes where we can discuss this arrangement in more detail.  If you would be interested in arranging such a meeting, please get in touch.

Paul Chilver

01206 217309

paul.chilver@birkettlong.co.uk

This article is for information only and does not constitute advice or a recommendation to act. Trusts require professional advice and expertise to ascertain suitability and to set up correctly.

The financial conduct authority does not regulate tax, trust and estate planning.