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Discounted Gift Trust (DGT)

The discounted gift scheme is an arrangement which allows you to make a gift for inheritance tax (IHT) purposes while retaining the right to a fixed income (in the form of regular withdrawals) for your lifetime (or until the trust fund is exhausted).

From the amount of capital to be gifted, you should calculate exactly the amount of ‘income’ which you require. It is possible to build in regular, fixed, increases in the level of ‘income’ to be taken, but this must be decided at outset. Once the arrangement has been set-up, it is not possible to vary the ‘income’ level other than through these pre-set increases, without jeopardising the IHT effectiveness of the arrangement.

Based on your age and state of health, the insurance company will place a value on this income using actuarial tables.

Usually an investment bond is used to hold the lump sum as its structure allows regular withdrawals to be made without immediate tax liability. A trust is then created which allows the remainder of the lump sum not required to provide your income to be gifted for your beneficiaries. Either a flexible or an absolute trust can be used:

Flexible Trust
A flexible trust is created with the capital sum. For inheritance tax purposes you will be making a chargeable transfer of the amount placed into trust discounted by the actuarial value of the regular ‘income’ payments that you wish to retain. This is because a transfer for inheritance tax purposes is valued as the amount by which your estate is reduced by making it. The ‘income’ remains yours and so is not included in the value of the gift.

A flexible trust, as implied by the name, is one which offers more flexibility than an absolute trust. This would allow you to change the proportions in which each beneficiary benefits from the gift, remove beneficiaries or appoint new beneficiaries.

Absolute Trust
An absolute trust is created with the capital sum. For inheritance tax purposes a potentially exempt transfer of the amount placed into trust less the value of the regular payments you wish to retain to use as an effective income is made. This is because a transfer for inheritance tax purposes is valued as the amount by which your estate is reduced by making it. The ‘income’ remains yours and so is not included. On your eventual death the ‘income’ ceases and so, whilst it remains in your estate, it has no value for inheritance tax purposes. This is where the ‘discount’ comes from.

With an absolute trust, there is no facility to alter the shares of any beneficiary. In the event of the death of a beneficiary before a payment is made, their share would pass under their will (or laws of intestacy if there is no Will).

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The Financial Conduct Authority does not regulate tax planning.