For customers Discretionary Discounted Gift Trust
Your guide to our
Discretionary Discounted Gift Trust
Discretionary
trusts
In our Place your trust with us – an introduction guide we gave you
an overview of why you’d want a trust and introduced discretionary trusts.
In this guide we look at our Discretionary Discounted Gift Trust.
What’s our Discretionary Discounted Gift Trust for?
Our Discretionary Discounted Gift Trust is for
people who:
Our Discretionary Discounted Gift Trust may not be suitable for everyone.
Our table below shows what it can and can’t offer you.
• want to save inheritance tax (IHT) over time;
Feature
• need some access to the money they’re gifting but don’t need this
access to be flexible in the future; and
• want some flexibility over who the beneficiaries will be and when
they can benefit from the trust.
IHT savings
4
Limited access to the money gifted to trustees
4
Access to growth on money invested
4
Add, remove or change beneficiaries
4
Alter beneficiaries’ entitlement
4
All references to taxation are based on our understanding of current
taxation law and practice in the United Kingdom and Ireland, which
may change.
The value of any tax relief depends on your individual circumstances/
the individual circumstances of the investor.
Trusts establish legal rights and entitlements and might have material
financial and tax implications for the settlor, trustees and beneficiaries.
Aegon Ireland isn’t authorised to provide legal advice, so you should take
your own legal advice before setting up a trust, to make sure that it meets
your requirements. Our trusts have been drafted for use by UK-domiciled
individuals.
Your guide to our Discretionary Discounted Gift Trust
Page 2
How our Discretionary Discounted Gift Trust works
You set up the trust and make a cash
gift to your chosen trustees.
Trustees invest the cash gift in
our Wealth Management Portfolio*.
Remember, with our trusts you’ll automatically be a trustee but you can also ask
other people to be a trustee. The trustee(s) will manage the Wealth Management
Portfolio on behalf of the beneficiaries.
When you set the trust up, you decide what access you’re retaining to the trust fund
– this is your retained right. This access you’ll retain will be through set regular
payments that can’t be altered once the trust has been set up. When deciding on
your payment stream, you might want to bear in mind that for maximum income
tax efficiency, your payments plus other withdrawals the trustees will be making
(for example for ongoing adviser charges) shouldn’t be more than 5% of the
premium the trustees will be investing in the Wealth Management Portfolio.
You can read more about adviser charges later in this guide.
Trust allows for a wide range
of possible beneficiaries.
*The European portability option isn’t available
on Wealth Management Portfolio where the
investment is made by trustees.
The value of an investment can fall as well as rise
and isn’t guaranteed. You could get back less
than you originally invested.
If you want to include someone as a possible beneficiary who isn’t within one of
the classes detailed in the trust, you need to let the trustees know this in writing.
Your financial adviser can give you full details of all the classes of beneficiaries
the trust covers.
Your guide to our Discretionary Discounted Gift Trust
Page 3
What’s the IHT treatment of our Discretionary Discounted Gift Trust?
For you
Setting up the Discretionary Discounted Gift Trust is treated as making a
chargeable lifetime transfer (CLT) for IHT purposes. Tax may be payable
immediately if the value of the CLT together with the value of any other
CLTs you’ve made in the previous seven years exceeds the available
nil-rate band. If tax is due, the rate payable is 20%. Working out your
available nil-rate band can be complicated. Please speak to your financial
adviser for more information on your personal situation.
If tax is due, the rate payable is 20%. If you live for seven or more years
after making the gift there’ll be no more tax to pay on your gift.
If you die during the seven year period, the tax on the gift to the trust is
recalculated using the rate of tax applicable at death which is currently 40%.
Depending on how long has passed between the date of the gift and
the date of death, taper relief could reduce the recalculated tax. Any tax
paid when the trust was set up is treated as a non-repayable credit when
working out any additional tax payable on death. See our example on the
following page to see how taper relief works.
With our Discretionary Discounted Gift Trust the value of the CLT isn’t the
same as the amount you actually give to the trustees. This is because you
retain some value through your retained right to receive payments from
the trust, and this retained value (known as the ‘discount’) is deducted
from the amount paid to the trustees when working out your gift for IHT
purposes. The discount is based on a current value of your projected
income stream over your expected lifetime when the trust is set up.
This is a complex matter, your financial adviser will be able to explain
this in more detail.
We provide underwriting to calculate any discount and work out the
value of the CLT into trust. If tax becomes due, the value of the CLT
may have to be negotiated separately with HM Revenue & Customs
(HMRC). For example, HMRC may re-calculate if they feel you didn’t
disclose all necessary information to us originally.
In addition, you won’t pay any IHT on any investment growth on the
Wealth Management Portfolio.
Your guide to our Discretionary Discounted Gift Trust
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What’s the IHT treatment of our Discretionary Discounted Gift Trust? – continued
How taper relief works
To keep things simple, in this example we’ll assume that the IHT nil-rate band has already been used and that the gift amount liable for IHT is £200,000.
The table shows the IHT that would be calculated on the gift. Please bear in mind that if the IHT calculated at death is lower than the IHT paid on the CLT
at lifetime rates there’ll be no repayment of the IHT already paid.
Survival period
Gift amount liable
for IHT
IHT at 40%
Taper relief reduction
applied to IHT
IHT calculated
at death rate
0 – 3 years
£200,000
£80,000
0%
£80,000
3 – 4 years
£200,000
£80,000
20%
£64,000
4 – 5 years
£200,000
£80,000
40%
£48,000
5 – 6 years
£200,000
£80,000
60%
£32,000
6 – 7 years
£200,000
£80,000
80%
£16,000
For the trustees or the beneficiaries
The beneficiaries of our Discretionary Discounted Gift Trust don’t have an IHT liability on the trust fund. IHT may be payable by the trustees every 10 years
(sometimes called anniversary charges) and when money leaves the trust (sometimes called exit charges). The trustee IHT rate is 6%.
The calculations of trustee IHT liabilities are quite complex. Additional complexity is caused by your retained right not being treated as part of the trust
fund for the purposes of the calculations. On the plus side, payments of your retained rights don’t count as money leaving the trust for the purposes of
calculating exit charges. The trustees may require professional advice if the size of the trust fund means IHT may be due.
Your guide to our Discretionary Discounted Gift Trust
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Discretionary Discounted Gift Trust in practice
Thinking about how it all works in practice can be quite complex. Read our case study to help you understand how it works and its benefits
of it. Please remember this is just an example and doesn’t take into account your personal circumstances. This example is for illustrative
purposes only.
Discretionary
Discounted Gift Trust
Sandra, aged 68, has been
widowed for five years. She has
£500,000 she’s willing to gift
but also needs to supplement
her other income.
Sandra takes 5% a year of the
original amount invested in the
Wealth Management Portfolio
from the trust. This will give her
a yearly income of £25,000.
Her financial adviser
recommends our Discretionary
Discounted Gift Trust for use
with our Wealth Management
Portfolio.
Her adviser obtains a discount quote
based on normal health. From the initial
amount of £500,000 the discount is
calculated at £316,342 – this is based on
Sandra taking 5% a year from the trust.
Sandra will achieve an
immediate saving of £126,537
(£316,342 x 40%). Future growth
is also outside of Sandra’s IHT
estate.
Her adviser explains that Sandra
will have to complete a health
questionnaire and go through
the underwriting process to
calculate the amount of any
discount.
The actual amount of her gift for IHT
purposes is £183,658 (£500,000 –
£316,342) and is a CLT for IHT purposes.
As Sandra hasn’t made any previous gifts
this doesn’t give rise to an immediate
IHT charge.
Sandra is happy with this
and completes the necessary
documents to set up the trust.
Sandra gifts the trustees (Sandra and her adult
children) £500,000 and they invest the money
into our Wealth Management Portfolio.
She’d like her three
grandchildren to to be
the beneficiaries.
Sandra appoints her two
adult children as additional
trustees. Sandra is also a
trustee.
Your guide to our Discretionary Discounted Gift Trust
Page 6
Fifteen years later
Sandra passes away –
the Wealth Management
Portfolio held in the trust
is worth £362,000**
at the date of her death.
At the 10th anniversary
of setting up the trust
the trustees would have
had to work out whether
any tax was due. In this
example we’ve assumed
that the trust had no IHT
to pay.
The Discretionary Discounted Gift Trust did what Sandra wanted it to do.
• She’s achieved total IHT savings of £294,800 – this is made up of the original amount excluded from her IHT estate
as she survived for more than seven years after setting up the trust (£500,000 x 40% = £200,000) and the future growth
on the trust investment automatically excluded from her IHT estate (£237,000 x 40% = £94,800).
The growth is calculated by looking at the value of the Wealth Management Portfolio when Sandra dies, how much she’d
received back in income and what the original investment was. The calculation assumes that the trust had no IHT to pay at
the 10 year anniversary.
– £362,000 (value at death) plus £375,000 (15 years income at £25,000) = £737,000
– £737,000 less £500,000 (original investment) = £237,000 (growth on Wealth Management Portfolio)
• She received £25,000 yearly to top up her other income.
• The arrangement was income tax efficient, as the withdrawals were within the yearly cumulative 5% tax-deferred allowance.
• The trust fund was available to the trustees to benefit her children and grandchildren after her death.
**Based on Financial Conduct Authority maximum mid-growth rate.
Your guide to our Discretionary Discounted Gift Trust
Page 7
How to set up our Discretionary Discounted Gift Trust
You’ll need:
• Discretionary Discounted Gift Trust deed: You use this to make the
gift of cash to the trustees. You’re the person setting up the trust (the
settlor) and you’ll automatically be a trustee. As we mentioned earlier,
you might want to include other trustees as well. You must make sure
anybody you ask is an adult and is able to represent themselves. You
can’t ask someone who’s unable to make decisions for themselves to
be a trustee.
This trust automatically includes a wide range of possible beneficiaries,
but you should have a look at the classes of beneficiary included and
decide whether you want to include anyone who isn’t in one of these
classes. If so, you’ll have to notify the trustees of this in writing.
In the trust deed you specify how much you’re transferring to the
trustees in total (the ‘initial gift’). This amount will be the total amount
transferred, which may be more than the trustees invest in the Wealth
Management Portfolio if they ask us to facilitate adviser charge. You can
read more about adviser charges later in this guide.
You’ll specify in the trust deed the amount that the trustees are going
to invest (the ‘original sum’). You then set out how much you want to
receive back, as your payment stream, from the trust. This will be a
percentage of the ‘original sum’ – the amount the trustees invest in
the Wealth Management Portfolio.
• Wealth Management application form: This is the form the trustees
complete to invest the money you’ve gifted to them in the trust. It
must be completed after the trust has been set up. The trustees apply
as owners, and have to decide whose life the Wealth Management
Portfolio will cover (known as the life or lives assured). With discounted
gift trusts, the IHT rules means that it’s not possible for the person
setting up the trust (settlor) or their spouse to be a life assured, so the
lives assured chosen will have to be trust beneficiaries. This also has
an income tax advantage in that the Wealth Management Portfolio will
continue after your death, giving the trustees maximum flexibility about
how its cashed in, and who pays tax on it.
The application form is where the trustees ask us to make payments
back to you to meet your retained rights entitlement from the trust.
The percentage withdrawal that the trustees ask us to pay will match
the percentage you’re entitled to under the trust. Please see the section
on the following page on adviser charging for how much you’ll get back
if the trustees ask us to pay their adviser an initial adviser charge.
• Application for a health assessment: You need to complete
this document and send it to us so we can work out through our
underwriting process whether there’ll be a discount when working
out the amount of the gift into trust, and if so, how much.
Your guide to our Discretionary Discounted Gift Trust
Page 8
Adviser charges
It’s important you understand how any payments to your adviser (for his
or her services) should be made.
• For example, you set up a Discretionary Discounted Gift Trust with
an initial gift of £100,000.
We can’t facilitate an adviser charge to your adviser for advice given to
you by your adviser for setting up the trust. You should arrange to pay for
this advice separately.
• The trustees ask us to pay their adviser an initial adviser charge of
£3,000 before the Wealth Management Portfolio is set up.
You and the other trustees can ask us to facilitate payments of adviser
charges in respect of the advice you receive from your adviser in your
capacity as trustees. Adviser charge payments are treated as withdrawals
for tax purposes, so in some cases the combination of adviser charge and
payment of the settlor’s entitlement under the trust will cause an income
tax liability to arise.
• This means £97,000 will actually be invested so the 5% tax-deferred
withdrawal allowance will be £4,850 per year (£97,000 x 5%). If you
ask for a 5% entitlement you’ll receive 5% of the £97,000.
• The trustees also ask us to pay their adviser a yearly ongoing adviser
charge of 0.5% of the original sum (£97,000 x 0.5% = £485) to
their adviser for their ongoing advice to them. If you asked for a
5% entitlement to the original sum, paying this entitlement and the
ongoing adviser charge will mean there’s an income tax liability. You
should speak to your financial adviser about the impact any ongoing
adviser charge the trustees ask us to pay may have.
Important: ongoing adviser charges based on the fund value (which
will vary) will cause a particular problem as your entitlement can’t
be changed and may cause you to go over the 5% tax-deferred
allowance.
This can be a complex area, you should speak to your financial adviser if you want any more information.
Your guide to our Discretionary Discounted Gift Trust
Page 9
Any questions
We’re not allowed to give you any advice about your IHT
position or whether our products or trusts may be suitable
for you. Your inancial adviser will be able to help you with
this and you may also want to get advice from your tax or
legal adviser before putting any trust planning in place.
Aegon is a brand name of Aegon Ireland plc. Aegon Ireland plc, registered office: 2nd Floor, IFSC House, Custom House Quay, Dublin 1, D01 R2P9, Ireland. Registered in Ireland (No. 346275).
Authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are
available from us on request. An Aegon company. www.aegon.ie © 2017 Aegon Ireland Plc
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