What is a Discounted Gift Trust (DGT)?
A Discounted Gift Trust is an investment fund set up by a qualified financial adviser for his/her client.
The Discounted Gift Trust allows your client to put a lump sum into trust whilst retaining the right to receive regular payments. … 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 Eligible for a DGT?
- Expats: non-residents in the UK or UK domiciled expats
- Under 84 years of age
- In good health
- want to ensure that if necessary, there is access to an emergency cash lump sum
- may wish in the future to add further monies/assets to the trust
Why Set Up a Discounted Gift Trust (DGT)?
- As an emergency fund and extra retirement income in the future
- As a trust fund for your children or grandchildren which may reduce Inheritance Tax (IHT)
- As a retirement fund with 5% withdrawal per year on reaching a certain age in life whilst reducing Inheritance Tax
What Types of DFT are there?
- Bare Trusts
- Discretionary Trusts
A bare trust is exempt from IHT.
A discretionary trust is chargeable to IHT at only 20% rather than 40%. Discretionary trusts are more flexible and can be changed during the life of the settlor.
- A bare trust may be preferable, because it is exempt from Inheritance Tax (IHT) after 7 years
When set up under a Bare Trust, the value of the Gifted Fund (DGT) is a potentially exempt transfer (PET) for IHT purposes. Providing the Settlor survives 7 full years from the date the trust is established, the full value of the Gifted Fund will be outside of their estate for IHT assessment purposes.
- A discounted trust fund is more flexible and attracts 20% IHT
Where the trust is established using the discretionary trust provisions, the transfer to the trust is a chargeable lifetime transfer (CLT). If the value of the discounted gift is more than the Settlor’s available nil rate band (the nil rate band is £325,000 for the tax year 2019/2020) the excess will be chargeable to IHT at 20%. This excess can potentially be reduced by a further £6,000 if the client(s) have not used their annual IHT exemption of £3,000 for both the current and previous tax years.
What is the Tax on a Discounted Trust Fund?
- No income tax
- No capital gains tax
- No inheritance tax on bare trusts if the settlor survives 7 years. Discretionary trusts (more flexible trusts) attract 20% IHT
Can I Move My Existing Offshore Bond into a Discounted Gift Trust
Yes.
A Discounted Gift Trust Explained
- Set up an offshore bond or move an existing international offshore bond into a DGT for tax planning & retirement planning purposes
- There is no income tax or capital gains tax on the bond
- IHT may be reduced; a bare trust has zero IHT if the settlor survives for 7 years after setting up the bond
- The trust is set up to pay out to your named beneficiaries on death
- Beneficiaries can be spouses, partners, children, grand-children or charities
- Educational trust can be set up for children or grandchildren. Money can be distributed to them later in life under an “access fund”.
- Monies can be held in a DGT as a retirement fund
- 5% withdrawals per year can be taken at retirement age or an age you can decide with the trustees
Discounted Gift Trust Fund Example
Reg is a British expat living abroad in the Philippines. He is 65 years old and has an ex-wife in the UK and a new wife in the Philippines.
He has two children and four grand-children.
Reg wants to reduce the amount of Inheritance tax on death and set up a trust fund for his grand children’s university education.
Reg wants access to his capital at 80 years of age. He wants to take 5% per year from the trust fund.
Reg has 200,000 GBP to donate to the Discounted Gift Trust (DGT).
A small donation of 10,000 GBP will be taken from the access fund in ten years’ time for his grand children’s education.
The rest of the fund, 190,000 GBP, will remain invested. He will take out 10,000 GBP per year (5% withdrawal) out of the trust fund every year from 80 years of age.
The trust will be paid out to his new wife in the Philippines upon death and it avoids probate in the UK.
So, instead of his wife waiting years to get a pay-out upon death, she gets an immediate payout and it avoids going through the courts in the UK.
How is a Discounted Trust Fund Set Up?
There are three components to a DGT:
- Trustee
- Settlor
- Beneficiary
What is a Trustee?
An individual person or member of a board given control or powers of administration of property in trust with a legal obligation to administer it solely for the purposes specified.
In this case, it is the offshore trust.
What is a Settlor?
A person who makes a settlement, especially of a property.
In this case, it is YOU.
What is a Beneficiary?
A person who derives advantage from something, especially a trust, will, or life insurance policy.
In this case, it is your spouse, partner, children, grandchildren or charity.
Who Can Set up a Discounted Gift Trust?
- British expats
- Other expats, e.g. Irish expats, European expats, Scandanavian expats, African expats, Latino expats
- Must be 84 years or under
- Eligible if you are UK non-resident or UK domiciled, i.e. eligible for expats
The Isle of Man DGT
This Discounted Gift Trust is held in the Isle of Man for probate purposes. Inheritance tax can be mitigated. A reduction in the amount of Inheritance Tax (IHT) paid out in the UK is possible.
Who Has Access to All My Information?
Under Tax Regulations and intergovernmental agreements entered into by the Isle of Man in relation to the automatic exchange of information for tax matters (collectively “AEOI”), the offshore bond is required to collect information about each Settlor, Trustee and Named Beneficiaries of trusts.
Where any of the Named Beneficiaries are minors, this will be required once they reach 18 years old.
What is a DGT invested in?
- Can invest in shares, ETFs or unit trusts
- Can invest in GBP, USD, EUR, AUD, CHF or Japanese Yen
Can it Invest in Cryptocurrency?
Yes, it can via Bitcoin funds or trusts.
How Much Does a Discounted Gift Trust Cost?
Ask a qualified financial adviser.
How Do I Set Up a DGT?
Expats cannot set up a DGT on their own, they are legally required to set up a DGT via a qualified financial adviser.
Click here to contact an adviser.