Discounted gift trusts explained

At the recent Birkett Long inheritance tax investment opportunities seminar we covered some of the options available to help an individual reduce their inheritance tax liability.   These included a Flexible Reversionary Trust, a Discounted Gift Trust and information on the Main Residence Nil Rate Band, which came into effect on 6 April 2017.

In addition, we briefly covered some of these areas in our last Independent Financial Advice newsletter, but in this article I am going to concentrate on the use of a Discounted Gift Trust.

What is a Discounted Gift Trust?

A Discounted Gift Trust is an arrangement that allows an individual to give away a sum of money yet retain the right to receive an income from it, usually 5% per annum as this takes advantage of the 5% tax deferred withdrawal facility under an investment bond.  Once the income level is agreed and set it is irrevocable and therefore cannot be changed in the future.  The actual gift goes into a trust for the individual’s chosen beneficiary or beneficiaries.

This type of arrangement is called a Discounted Gift Trust because the value of the Gift may be discounted for Inheritance Tax purposes, with immediate effect.

The insurance company will decide what discount is to be given based on factors including an individual’s health and age; therefore the younger and fitter you are, generally the higher discount.  To provide an example: if Mr Smith, who is 65 years old and in good health, invested £100,000 and requested income at 5% per annum, the insurance company may value the initial discount at £60,000, leaving a gift of £40,000.  This would mean that £60,000 would be outside Mr Smith’s estate immediately and, should Mr Smith survive for a full seven years after the original gift, the remaining gift, together with any growth on the investment, will be outside Mr Smith’s estate for inheritance tax purposes.  The whole value of the investment bond will be held within the trust but the amount of regular withdrawals paid to Mr Smith will continue beyond the seven years.

“A Discounted Gift Trust is not suitable for everyone but assuming you are in good health, likely to live seven years and require an income from the investment, this could be an excellent way of mitigating inheritance tax.”

As stated earlier, the investment would be made to an investment bond.  Our financial advisers would make a recommendation on the funds to be invested into this arrangement, taking into account your attitude to risk and your existing financial arrangements.

We are pleased to offer a free initial meeting of up to 30 minutes where we can discuss this arrangement in more detail.  If you would be interested in arranging such a meeting, please get in touch.

Paul Chilver
01206 217309
paul.chilver@birkettlong.co.uk