For customers Bare Discounted Gift Trust
Your guide to our
Bare Discounted Gift Trust
In our Place your trust with us – an introduction guide we gave you
an overview of why you’d want a trust and introduced bare trusts.
Bare trusts
In this guide we look at our Bare Discounted Gift Trust.
What’s our Bare Discounted Gift Trust for?
Our Bare Discounted Gift Trust is for people who:
• want to save inheritance tax (IHT) over time;
• need access to the money they’re putting in the trust; and
• know who the final beneficiaries of the trust will be and understand they
can’t add or remove beneficiaries or alter the share they’re entitled to.
Our Bare Discounted Gift Trust may not be suitable for everyone.
Our table below shows what it can and can’t offer you.
Feature
IHT savings
4
Limited access to the money gifted to trustees
4
Access to growth on money invested
4
Add, remove or change beneficiaries
6
Alter beneficiaries’ entitlement
6
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 Bare Discounted Gift Trust
Page 2
How our Bare Discounted Gift Trust works
You set up the trust and make a cash
gift to your chosen trustees.
You say who you want the
beneficiary (beneficiaries) to be.
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.
Trustees invest the cash gift in
our Wealth Management Portfolio*.
*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.
Your guide to our Bare Discounted Gift Trust
Page 3
What’s the IHT treatment of our Bare Discounted Gift Trust?
For you
Setting up the Bare Discounted Gift Trust is treated as making a
potentially exempt transfer (PET) for IHT purposes.
If you live for seven or more years after making the gift, it will be
exempt from IHT.
If you were to die during the seven-year period, the PET will become
chargeable to tax. If tax is due, the tax payable on the gift could be at a
rate lower than the 40% rate due on transfers on death. This is because
taper relief will apply if the amount gifted to the trust plus earlier taxable
gifts, is higher than the amount of the IHT nil-rate band. See our example
on the next page to see how it could be reduced.
Even if the PET becomes taxable and you don’t benefit from a reduced
rate of tax, the trust could still allow you to save IHT. The reason for this
is that the value of the PET on making the gift to the trust isn’t the same
as the amount you gifted to the trustees.
You retain some value through your retained right to receive payments
from the trust, and this value (known as the ‘discount’) is taken from the
full amount gifted to the trustees when working out the value of your
PET for IHT purposes.
The discount is worked out by putting a current value, taking into
account your likely life expectancy, on the projected payment stream
you’ll receive over the coming years (this is a complex matter, your
financial adviser will be able to explain this in more detail).
You’ll have to go through our underwriting process to allow us to
calculate the value of the PET. The value of the PET may have to be
negotiated separately with HM Revenue & Customs (HMRC) if tax
becomes due. For example, HMRC may re-calculate if they feel you
didn’t disclose all necessary information to us originally.
In addition to this, you won’t pay any IHT on any investment growth
on the Wealth Management Portfolio.
Your guide to our Bare Discounted Gift Trust
Page 4
What’s the IHT treatment of our Bare 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 due on the gift.
Survival period
Gift amount liable
for IHT
IHT at 40%
Taper relief reduction
applied to IHT
Reduced inheritance
tax due
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
More than 7 years
Nil as now exempt
Nil
N/A
Nil
For the trustees or the beneficiaries
The trustees of our Bare Discounted Gift Trust don’t have an IHT liability. The value of the trust fund (which takes into account the current value of your
projected payment stream – your retained rights), is treated as owned by the beneficiaries for IHT purposes.
Your guide to our Bare Discounted Gift Trust
Page 5
Bare 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.
Bare trusts
Martin has had a successful career
working in the oil industry. He’s now
retired aged 62.
He has savings of £700,000
and his house in Perthshire
is worth £600,000.
Martin needs an income from his
savings, but wants to save IHT too.
Martin decides to take
regular yearly payments
of 5% – this will give him
£25,000 each year.
Martin’s financial adviser
recommends he sets up our
Bare Discounted Gift Trust
with £500,000.
Martin goes through our
underwriting process and as
he has some health issues,
we calculate his discount as
£330,595. This means the
value of his gift to the trust is
£169,405 (£500,00 – £330,595).
Martin will automatically be a trustee
but he also appoints his two sons as
trustees.
He’s reassured that the trustees
aren’t able to make payments to
the beneficiaries until after his death.
Martin is happy with this.
He completes the necessary
paperwork and sets up the trust.
Martin gifts the trustees £500,000 and they invest the
money into our Wealth Management Portfolio bond.
Martin decides that his four grandchildren
should be the beneficiaries.
He understands that with this type of
trust the beneficiaries can’t be changed.
Your guide to our Bare Discounted Gift Trust
Page 6
Seven years later
Martin is still alive
which means he’s no
tax to pay on the gift.
So the Bare Discounted Gift Trust did what Martin wanted it to do.
• He’s saved £200,000 (£500,000 at 40%).
• Even if he’d died during the seven-year period, he’d have made
a saving of at least £132,238 (£330,595 x 40%). This is because
although his health meant he didn’t get the full normal IHT discount
he did qualify for a reduced discount of £330,595.
• Any growth on the Wealth Management Portfolio held within the
trust would also have been outside his estate. So Martin isn’t liable
for IHT on it.
Your guide to our Bare Discounted Gift Trust
Page 7
How to set up our Bare Discounted Gift Trust
You’ll need:
• Application for a health assessment: You need to complete this and
send it to us so we can calculate through our underwriting process
whether there’ll be a discount. Any discount amount will be deducted
from the amount you pay the trustees to calculate your gift for IHT
purposes.
• Bare 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 can’t make decisions for themselves to be a trustee.
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 if they ask us
to facilitate adviser charges. You can read more about adviser charges
later in this guide.
You’ll also specify in the trust deed the amount that the trustees are
going to invest in the bond (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 Portfolio application form: This is the form
the trustees complete to invest the money you’ve gifted to them.
The trustees apply as owners and have to decide whose life the Wealth
Management Portfolio will cover (known as the life or lives assured).
The Wealth Management Portfolio will end when this person dies
(or when the last person covered dies if there’s more than one person).
With discounted gift trusts, it’s not possible for the person setting up
the trust (the settlor) or their spouse to be a life assured, so the lives
assured chosen will have to be the 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
following section on adviser charging for how much you’ll get back
if the trustees ask us to pay their adviser an initial adviser charge.
You have to clearly identify the beneficiaries of this trust as well as their
shares if they don’t each have equal shares. Beneficiary entitlements
can’t be changed in future, so this is an important step when
completing the trust.
Your guide to our Bare 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.
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.
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 if the trustees ask us to facilitate adviser charges this
will affect the amount of the tax-deferred 5% withdrawal allowance that’s
available. You should bear this in mind when deciding how much your
entitlement should be.
For example:
• You set up a Bare Discounted Gift Trust with an initial gift of
£100,000.
• The trustees ask us to pay their adviser an initial adviser charge
of £3,000 before the Wealth Management Portfolio is set up.
• 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 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 set up 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 charge 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 Bare 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 could be suitable
for you. Your inancial adviser will be able to help you with
this. 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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