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Overview
The client gifts money to a trust and receives regular fixed capital payments for the whole of their life or until the trust fund runs out. As the trust is a bare trust the beneficiaries are fixed and it is not possible to change them after the trust is declared.
Quick facts
- For use with the Collective Investment Bond.
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This is a trust which your client, the settlor, creates by means of a gift, but under the terms of which they retain the right to receive certain capital payments.
- These payments may continue for the whole of their life, or until the trust fund has been exhausted.
- Depending on the age and health of the settlor, and the amount of withdrawals required; there may be an immediate saving for inheritance tax (IHT).
- The settlor chooses their trustees. They can also appoint themselves as a trustee. We recommend having an independent trustee.
- The beneficiaries are named by the settlor at outset and cannot be changed later.
Discounted Gift Trust – Discount calculator
Use our handy discount calculator to help you estimate the discount that may apply.
Can be used for both new business and for the 10 yearly periodic charge.
Deeper dive
Not all discounted gift trusts are the same.
Watch this spotlight session for a deeper dive on how this trust works and how you can master its flexibility.
Suitability
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.
Technical support
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IHT planning and a discounted gift trust - This article provides information about inheritance tax planning for UK-domiciled individuals, where a gift has been made and the individual still requires access to withdrawals.