A discounted gift trust could be a solution for inheritance tax planning

When I meet a client that is looking for Inheritance tax advice there are a number of possible solutions I may recommend and so I thought it would be useful to discuss them.

In the second in my series of articles, I consider the popular Discounted Gift Trust solution.

So what benefits does the DGT offer you?

Tax-efficient regular payments during your lifetime.
The opportunity at outset to choose a payment level and its frequency.
Capital for your family or chosen beneficiaries after death.
The potential for an immediate reduction in the inheritance tax liability on your estate.
Diverse investment options, helping to spread the risk.
Single or joint settlor arrangements.
The people you choose to be the beneficiaries of the trust may receive modest. amounts of capital during your life, at the discretion of the trustees and subject to certain conditions.

Is it suitable for you?

Do you want the potential for immediate and future IHT reduction.
Are you likely to survive seven years.
Do you want fixed regular payments.
Are you in reasonable health.

It may not be suitable if you

are older than 90 next birthday
are unlikely to have an IHT liability
are not in good health
might change your mind about the amounts you want back from the trust and when.

Let’s look at how the solution could work in more detail. As you are entitled to regular payments from a DGT, the value of your initial gift may be discounted for inheritance tax purposes. This means that the potential inheritance tax liability on your estate may be immediately reduced when you set up the trust.

The discount takes into account the payments you could expect to receive during the rest of your lifetime. It will also depend on factors such as your age, sex and state of health.
The discount is important because it is used to determine the value of a gift for certain inheritance tax charges that may arise.

We will normally give you an indication of the value when the trust is set up, based on medical evidence we have received. The actual amount of the discount will be decided by HMRC, but the indication we give you may help your representatives in negotiating this with HMRC.

There are other solutions for mitigating the effects of Inheritance Tax and this article is just one of many. Watch out for my next article in this series.

As this is a specialist area of advice it is important to seek out this information from an appropriate financial adviser. Richmond House Group has this specialist knowledge and are always available to answer your questions.

John Merrifield. Dip PFS, Cert (CII) MP

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. It does not constitute legal or tax advice and must not be treated as such. All statements concerning taxation are based on our understanding of the current law and HMRC practice, and proposed changes, as at the date of publication. Levels and bases of, and reliefs from, taxation are subject to change. The provision of advice in relation to taxation is not a regulated activity. The value of investments can fall as well as rise and you may not get back the full value of your investment.