Discounted gift trust - Bare

A bare discounted gift trust can be suitable for inheritance tax (IHT) planning as it moves some of the client’s assets outside of their estate for IHT purposes.  As with a standard bare / absolute trust, the gift to the trust is treated as a Potentially Exempt Transfer (PET) which will leave the estate if the settlor survives seven years from the date of the gift. However, with the DGT there may be an immediate reduction in the value of the estate – depending on the age and health of the settlor as well as the amount of withdrawals they have chosen to take.

The settlor names the beneficiaries and the share each will receive - this cannot be changed later. This type of trust might be suitable where the settlor wishes to ensure that particular individuals will benefit from the trust. If a beneficiary were to pass away their share of the trust fund will fall to their heirs.

This type of trust may be used by those who wish to guard against IHT but don’t want to lose access to all their capital. However, as the settlor’s rights to withdrawals cannot be increased; it is not suitable for clients who require flexible access to the trust capital. It may also be unsuitable for clients who do not require any withdrawals, as any withdrawals which are paid into the settlor's estate and remain unspent - will remain within the estate for IHT purposes.