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Setting Up Discounted Gift Trust

Setting Up Discounted Gift Trust

A Discounted Gift Trust (DGT) is one of the most effective estate-planning strategies for individuals who wish to reduce their Inheritance Tax (IHT) exposure while still enjoying a regular income from their capital. When a settlor establishes a DGT, the settlor's gift is split into two parts: the portion given away to the trust beneficiaries and the part retained by the settlor, known as the settlor's retained rights, which are carved out for IHT purposes.

It allows you to make a gift into a trust for the benefit of your chosen beneficiaries, but a portion of the value your retained right to income, also referred to as the settlor's rights or settlor's entitlement to regular payments is immediately “discounted” for IHT purposes. The value of the settlor's retained rights is determined by considering the settlor's life expectancy at the time of the gift. This actuarial calculation, based on the settlor's life expectancy, results in an immediate reduction in the value of the gift for IHT, as only the discounted value of the settlor's gift is considered a transfer for tax purposes.

How a Discounted Gift Trust Works

  1. Create the Trust : You transfer a lump sum (usually via an investment bond) into the trust. Investment bonds or bonds are commonly used due to their tax efficiency, as they facilitate regular withdrawals within tax allowances and simplify income tax and capital gains tax considerations. The individual establishing the trust is the investor, who makes the initial payment into the trust.
  2. Retain an Income : You retain access to the trust by receiving fixed regular payments (capital payments) for life (or a set term). These regular payments are predetermined, cannot be altered, and are a key feature that allows the settlor to retain access to their capital while not having full ownership. The right to receive these regular payments is carved out from the trust, ensuring they are not included in the estate for inheritance tax purposes.

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    After step 2: Medical underwriting is required to determine the discount based on the settlor’s age and health, and for joint settlors, the calculation is based on joint life expectancy.

    1. Discounted Value : The discount is calculated as an immediate reduction in the value of the gift, reflecting the value of the settlor’s retained rights. Because you keep the right to those withdrawals, HMRC treats part of the gift as if it were never given away. That “discount” is outside your estate immediately.
    2. Start the 7-Year Clock : The remainder of the gift is a chargeable transfer, and surviving seven years from the date of the transfer is necessary for full IHT exemption.
    3. Growth for Beneficiaries : Any growth on the trust fund is outside your estate from day one.
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    Key Advantages

    • Immediate IHT Saving: The retained income is actuarially valued and discounted from the outset, reducing the taxable amount.
    • Regular Withdrawals: Enjoy a predictable income stream to supplement retirement or lifestyle needs.
    • Estate Growth Protection: All investment growth is outside of your estate for IHT purposes.
    • Control & Flexibility: Trustees manage the funds for your chosen beneficiaries, ensuring your wealth passes according to your wishes.
    • IHT Planning: Discounted Gift Trusts (DGTs) are a valuable tool in IHT planning, allowing for efficient gifts while retaining certain benefits.
    • Trust Structure Options: DGTs can be structured as discretionary trusts, discretionary DGTs, absolute trusts, or bare trusts, each with different implications for the beneficiary, tax treatment, and flexibility for potential beneficiaries or named beneficiaries.
    • Trust Deed & Registration: The trust deed defines the rights of the settlor and beneficiaries, and the trust must be registered with the trust registration service to ensure legal compliance.
    • Relevant Property Regime & Taxation: DGTs fall under the relevant property regime, so periodic (10-year) and exit charges may apply. Chargeable events can trigger tax liabilities, and gains are taxed according to the tax year in which they arise.
    • Tax Efficiency: Withdrawals within the 5% annual allowance from investment bonds are not subject to income tax or income tax charge during the settlor’s lifetime.
    • Chargeable Transfers & Nil Rate Band: The value transferred into the trust is a chargeable lifetime transfer or chargeable transfer. The nil rate band and other chargeable transfers made in the previous seven years affect IHT calculations.
    • Beneficiary Arrangements: The trust can have named beneficiaries, chosen beneficiaries, or potential beneficiaries. If a beneficiary dies before the settlor, their share may form part of the beneficiary’s estate.
    • Flexibility for Future Changes: The flexibility of the trust allows for changes to beneficiaries at a later date, depending on the trust structure.
    • Trustee Responsibilities & Compliance: Trustees are responsible for managing the trust’s investments, and the use of DGTs must comply with anti-tax avoidance schemes regulations.
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    Discounted Gift Trust

    Who Should Consider a Discounted Gift Trust?

    A DGT can be ideal if you:

    • Have surplus capital you will not need in the future.
    • Wish to reduce a potential IHT liability immediately.
    • Want to retain a regular income from the gifted assets.
    • Prefer a structured investment with professional trustee oversight.

    The suitability of a DGT depends on individual circumstances, such as your health, age, and financial goals.

    It is particularly attractive to high-net-worth individuals, retirees, or those looking to lock in IHT savings while keeping financial independence.

    Professional Guidance is Essential

    Setting up a Discounted Gift Trust involves complex tax and legal considerations, including actuarial calculations and investment structuring.
    Incorrect drafting or unsuitable investment choices can jeopardise both the IHT benefits and the stability of your income.

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    How HeirPlan Can Help

    At HeirPlan, we specialise in creating bespoke estate-planning strategies for UK families, entrepreneurs, and high-net-worth individuals. Our team provides:

    • Tailored Suitability Analysis : We assess your financial goals, health, and income needs to determine if a DGT is appropriate.
    • Tax-Efficient Structuring : Our experts liaise with actuaries and investment providers to secure the maximum “discount” and ensure compliance with HMRC rules.
    • Trust Drafting & Administration : We handle the legal documentation, appoint trustees, and guide you through ongoing trust management.
    • Integration With Wider Planning : We coordinate your DGT with wills, Family Investment Companies, and other trusts for a complete IHT strategy.

    Next Steps

    A Discounted Gift Trust can deliver immediate and long-term tax savings, but timing and structure are critical.
    Book a free, confidential consultation with our estate-planning team to explore how a DGT could protect your wealth and secure your family’s future.

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