Stopping or Reducing Withdrawals from a Discounted Gift Trust

This article provides an overview of the inheritance implications of stopping or reducing the settlor’s withdrawals from a discounted gift trust.

Discounted gift trusts – summary

Under a discounted gift trust (DGT), the settlor makes a lifetime gift to trustees, usually in the form of an investment bond. At the same time, the settlor carves-out the right to fixed withdrawals for life, or until the trust fund is exhausted.

The retained right to withdrawals is valued using actuarial assumptions, including the settlor’s age and state of health. This produces a market value for the retained rights, that is, what an open market purchaser would be willing to pay to buy the settlor’s rights. The value of the settlor’s gift to the trust is reduced by the market value of the retained rights (known as the discount).

It’s important to note that any discount figures are subject to approval by HM Revenue and Customs.

Stopping or reducing withdrawals

The trust provides the settlor with an absolute right to their chosen level of withdrawals for life. However, if needed, the settlor may stop or reduce their right to withdrawals by executing a deed of waiver.

Stopping or reducing withdrawals will normally be treated as a further gift for inheritance tax purposes. The value of that gift depends on whether the change applies for a short period, permanently or until further notice.

*Age and health of the settlor may affect the value of the gift, particularly for longer periods of waiver or where the settlor is in poor health. In these cases, the value of the gift may be lower than the face value of the forgone withdrawals. An actuarial calculation may be required.

Does waiving withdrawals affect the original discount?

No. Inheritance tax legislation requires assets to be valued at their market value at the time of the gift. As a result, the original discount applied when the DGT was established cannot be revisited or recalculated. Any waiver of withdrawals is treated as a separate and additional gift.

Planning considerations

Why might the settlor reduce or stop their withdrawals?

At outset, the market value of the settlor’s retained withdrawal rights is treated as outside the estate for inheritance tax purposes, delivering an immediate IHT saving. Withdrawals paid to the settlor re‑enter their estate but are commonly spent and so usually have no IHT effect.

However, if the withdrawals are not spent, they’ll build up in the settlor’s bank account, increasing the value of their taxable estate on death. Altering the withdrawal rights will help stop or reduce the build-up of unspent payments.

This approach is likely to be best suited to those with a life expectancy of more than seven years, since death within that period may result in an inheritance tax charge on the full market value of the forgone rights.

Waiver requires a deed

As the settlor’s rights are created by the trust, simply stopping or reducing withdrawals from the trust bond is not enough. The rights are contractual, so they continue even if the payments are not taken. Any unpaid withdrawals will still form part of the settlor’s estate on death and must pass under their Will or, if there is no Will, the rules of intestacy.

To give up these rights, the settlor must execute a deed of waiver. Quilter can provide a draft deed on request, for use with our trust range. The deed must be executed by the settlor and cannot be signed by an attorney on their behalf.

The importance of valuing the gift

The settlor should establish the value of the gift created by the waiver. This will determine whether inheritance tax may arise if they die within seven years. Where a discretionary trust is used, the waiver will be a chargeable lifetime transfer (CLT). An immediate inheritance tax charge may arise if the settlor’s cumulative CLTs in the previous seven years exceed the nil rate band. Failure to report the transfer may result in HMRC penalties, as well as any tax due.

As the value of the waived rights depends on the settlor’s age and health at the date of waiver, an actuary may be needed to calculate it. The settlor is responsible for taking appropriate advice.

Summary

While it is possible to stop or reduce the settlor’s withdrawals from the trust, the process is not without complexity. The settlor must ensure that the gift is valued and assess the impact of that gift on their existing IHT planning.

An alternative to waiving withdrawals may be to pass them on as separate gifts as and when they arise. However, each gift can only be made once the settlor becomes entitled to the payment and, unless an exemption applies, it will take seven years for each gift to leave the estate.

A simpler alternative to both waiver and gifting is for the settlor to spend their money.

Approver - Quilter June 2026

Q00654/205/16344