Features and benefits
- Trust allowing your client to place a lump sum into trust whilst retaining the right to receive regular payments.
- Option to provide modest amounts of capital to beneficiaries during your client’s life as well as the remaining fund following your client’s death.
- The initial gift may be discounted offering the potential to immediately reduce your client’s Inheritance Tax liability.
- Access to a diverse choice of investment bonds from Prudential and Prudential International.
- Can be written as an absolute or discretionary trust, depending on your client’s needs.
- Single or joint settlor arrangements.
Please remember that the value of your client’s investment is not guaranteed and can go down as well as up. They may not get back what they have paid in and regular payments may erode the capital available to their beneficiaries.
About the Discounted Gift Trust
The Discounted Gift Trust allows your client to put a lump sum into trust whilst retaining the right to receive regular payments. The value of your client’s initial gift may be discounted for IHT purposes, potentially offering an immediate reduction in your client’s IHT liability. Following your client’s death, the trust can continue or be wound up according to the trustee’s wishes. The beneficiaries of the trust may receive modest amounts of capital during your client’s life and the remaining fund after your client’s death.
Who is the Discounted Gift Trust suitable for?
It may be suitable if your clients:
need the potential for immediate and future IHT reduction
are likely to survive seven years
need fixed regular payments
are in reasonable health.
It may not be suitable if your clients:
- are older than 90 next birthday (either true age or mortality rated)
- are unlikely to have an IHT liability
- do not need regular payments
- are not in good health
- might change their minds about the amounts they want back from the trust and when.
How the trust works
Choice of Trusts
The Discounted Gift Trust can be written as either an Absolute trust or a Discretionary trust, so you can decide which better suits your client's circumstances.
Trustees have the discretion to make distributions to anyone from a wide class of beneficiaries. May be suitable if your client is unsure who they would like trust assets to be distributed to.
Your client must select the beneficiaries and their share of the trust fund when setting up the trust. May be suitable if your client is sure of how they would like trust assets to be distributed.
For more detail on the choice of trust available and the implications, see our Guide to the Discounted Gift Trust (PDF).
Because your client is entitled to regular payments, the value of their initial gift may be discounted for Inheritance Tax purposes. This means that the potential Inheritance Tax liability on your client's estate may be immediately reduced when your client sets up the trust.
The actual amount of the discount will be decided by HMRC, but we will normally offer an indication of the value when the trust is set up, based on medical evidence provided. This indication may help your client's representatives in negotiating with HMRC.
The discount will take into account the following factors:
The level of payments your client could expect to receive during their lifetime – the more your client chooses to receive, the smaller the amount they are giving away, therefore the discount is likely to be larger.
Age and state of health - the longer your client's life expectancy, the more payments your client could expect to receive, therefore the discount is likely to be larger. If your client is in poor health at the start, the discount may be small and there could even be no discount at all.
Your client's gift is then reduced by the amount of any applicable discount. If your client sets up the trust with a spouse or civil partner, the total discount will be apportioned between them according to each person's age, state of health and so on.
The discount is important because it is used to determine the value of a gift for certain Inheritance Tax charges that may arise.
How is a trustee held bond taxed?
The trustees can withdraw up to 5% of the original investment each year without any immediate tax liability.
On surrender or part surrender of the bond a chargeable gain arises which could trigger an Income Tax liability. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
Who pays the Income Tax?
This depends on which type of trust your client has chosen.
The gain is treated as income of the beneficiaries and taxed at their highest marginal rate. Where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
If the settlors are alive and resident in the UK when an Income Tax liability arises, or it occurs in the tax year in which they die, the gain is treated as income of the settlors and taxed at their highest marginal rate. They may recover the tax from the trustees.
If it arises after their death (other than in the tax year in which they die), or when they are not resident in the UK, the tax charge will be assessed against UK resident trustees at the additional rate of tax for individuals.
In either case, where a UK bond is used the gain is accompanied with a tax credit which satisfies the basic rate tax liability.
The Discounted Gift Trust gives your client four investment options to choose from.
- Prudential Investment Plan: Prudential’s onshore bond
- Prudential Onshore Portfolio Bond: Onshore investment bond combining the advantages of a wide choice of assets available from a platform
- Prudential International Investment Bond: Prudential International bond
- Prudential International Investment Portfolio: Prudential International bond
Prudential can facilitate both Set-up and Ongoing Adviser Charges. Trustees should not pay for ongoing advice given to the settlor as that could be regarded as a reservation of benefit with adverse tax consequences.
More information on charges can be found in A guide to the Discounted Gift Trust (PDF).
The impact of taxation (and any tax reliefs) depends on your client’s individual circumstances.
The information is based on our understanding, of current taxation, legislation and HM Revenue & Customs practice, all of which are liable to change without notice.