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 Inheritance Tax (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. The beneficiaries of the trust may potentially 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?
Features and benefits
Key documents
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.
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 client guide to trusts.
The discount
Income Tax
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.
If a chargeable event occurs and a gain arises on that, then there may be an income tax liability. Gains on UK bonds are not liable to basic rate tax as the person liable for tax is treated as having paid tax at the basic rate on the amount of the gain.
Tax rules can change and the impact of taxation (and any tax relief) depends on your clients circumstances.
Who pays the Income Tax?
This depends on which type of trust your client has chosen.
Absolute trust
Where a chargeable event gain arises in the tax year following that in which the donor dies, the gain is chargeable on the beneficiary. In other cases the circumstances will determine who is liable.
Discretionary trust
Chargeable event gains will be assessed on the settlor while alive and UK resident and thereafter in tax years after death, on UK trustees. Where the settlor is liable, that person may recover the tax from the trustees.
Investment options
The Discounted Gift Trust gives your client three investment options to choose from.
Adviser charges
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 the client guide to trusts.
Tools & calculators
Important information
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.
