Discounted Gift Trust

• Trust allowing your client to place a lump sum into trust whilst retaining the right to receive regular payments.
  
  
• Option to potentially 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.

The value of any investment (and any income taken from it) can go down as well as up so your customer might get back less than they put in. Regular payments may erode the capital available to their beneficiaries.

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 for expenditure purposes

• 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.

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.

Discretionary trust

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.

Absolute trust

Your client must select the beneficiaries and their share of the trust fund when setting up the trust. These factors are then fixed and cannot be changed at a later date. 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 may need to be agreed with HMRC, but we will 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 if necessary.

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 clients gift for inheritance tax purposes, 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.

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 clients 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.