Discounted Gift Trusts

HBFS can advise you on Discounted Gift Trusts (DGT) - a type of UK trust arrangement usually set up in connection with an investment in either an onshore or offshore investment bond (insurance bond). It allows the gifting of a lump sum into a trust whilst retaining a life-long 'income' from that money (technically withdrawals of capital), with the over-arching aim of reducing the eventual IHT (inheritance tax) bill on death. 

Provided the settlor (the person making the gift into the trust) is in reasonable health, a calculation is made as to the likely total amount of 'income' that will be paid back to them by the trustees. This "bag of rights", normally know as the "discount", is deemed to be retained by the client and is immediately outside the Estate. The remainder will be treated like any other gift into trust (a chargeable transfer (CT) in the case of a discretionary trust, or a potentially exempt transfer (PET) for a bare trust), leaving the IHT net after 7 years (or 14 years in some cases).

In the event of the settlor dying within seven years, this retained "bag of rights" should in theory be returned to their personal representatives. However, the accepted IHT treatment, as has been tested many times and accepted by HMRC, is that this right to an income for life has no value once the settlor has died, and therefore no money has to be returned.

The effect is that the discount is deemed to leave their estate on day one of settlement of monies into the trust- the remainder will be treated like any other gift into trust and brought back into calculations if death occurs within 7 (in some cases 14) years. In effect, there is an immediate IHT reduction upon creation of a discounted gift trust .