Discounted gift trust - Discretionary

This type of trust can be suitable for inheritance tax (IHT) planning as it moves the client’s assets outside of their estate for IHT purposes.  As with a standard discretionary gift trust, the gift to the trust is treated as a Chargeable Lifetime Transfer (CLT) which will leave the estate if the settlor survives seven years from the date of the gift. However, with the DGT there may be an immediate reduction in the value of the estate – depending on the age and health of the settlor, as well as the amount of income they have chosen to take.

The discretionary version of the DGT provides for wide classes of beneficiaries. For example, both current and future children / grandchildren are included automatically. If the classes of beneficiaries do not include individuals who the client would want to benefit, they can add them to the trust deed.

This type of trust may be used by those who wish to guard against IHT but don’t want to lose access to all their capital. However, as the settlor’s rights to income cannot be increased; it is not suitable for clients who require flexible access to the trust capital. It may also be unsuitable for clients who do not require an income, as unspent income will remain within the estate for IHT.