How does the Discounted Gift Trust work?
The concept is quite simple. Imagine that you have, say, £500,000 in cash and investments, and that you are looking for investment income of £25,000 per year. You could use some of that money to purchase the right to an income of £25,000 per year for life, by buying an annuity.
Obviously the cost of the annuity would depend on your life expectancy – more if you are younger, and less if you are older or in poor health. Having made that purchase and guaranteed your required income for life, you could then afford to give away whatever is left of the £500,000.
The IHT rules say that you must survive such a gift by seven years for it to be effective. Provided you do so, there will be no tax to pay on your death.
With the Discounted Gift Trust, instead of purchasing the right to income for life on the open market, you establish a special trust using a trust deed prepared for you.
This trust specifies the level and frequency of regular, cash payments that you will receive for the rest of your life. Apart from those payments, you can receive no other benefit whatsoever from the trust.
The Revenue accept that, provided the trust is correctly drafted, the reservation of benefit rules do not apply to this arrangement.
There is a further benefit: Just as a real annuity dies with you - its value as an asset in your estate is nil for tax purposes - so does the right to receive the regular cash sums under the Discounted Gift Trust. Hence the value of that right plummets to nil when you die. The effect of this is that if you are unlucky enough to die within seven years, you should still achieve a tax saving.
This is not possible with "ordinary" gifts. The amount of tax
saved depends on your life expectancy at the time of setting up the Discounted
Gift Trust.