Discounted Gift Schemes

If you have an IHT issue and sufficient capital to make a gift, but are unsure of giving some of your capital away because you do not want to loose the income potential from the capital just in case of a future Long Term Care need or other unexpected costs, or would like to be able to provide a lump sum to "help out the children" should they need it in the future, but at the same time are concerned that, because of capital in your estate, your beneficiaries will have a large inheritance tax bill to pay on your death, a Discounted Gift Scheme may help to resolve your problem.

How does it work?
A discounted gift scheme is a gift into a trust. The gift, less a discount, is a Potentially Exempt Transfer (PET), which means that 7 years after making the gift, the gift does not get included as part of your estate when calculating your Inheritance Tax liability.

When the gift is made the donor (giver of the gift) designates a level of income he or she would like to receive from the money for the rest of their lives or set period of time. (With some schemes not all of the income designated has to be taken each year and the unused income is deferred to be taken in a future year or years).

When the gift is made the insurance/investment company works out how much income is likely to be paid for the rest of your life and comes up with a discount figure based on the amount of this income, which means the actual PET when the gift is made, for inheritance tax calculations, is the original gift less the discounted figure, thus giving the estate an immediate IHT reduction when the gift is made.

Once the gift is made the donor is entitled to receive the income chosen from the investment for the rest of their lives. Some schemes have the added flexibility that, at the discretion of the trustees, the trust can pay out lump sums to anyone named in the second class list of beneficiaries during the donor's life time or can add new second class beneficiaries to the list so that payments can be made to these new beneficiaries, for example a Care Home.

The income, depending on the scheme used, can either be a regular fixed or increasing payment, either monthly, quarterly, half yearly or annually, or can be paid out on an add hoc basis.

In Summary
The person making the gift (the donor) has the opportunity to instantly reduce the value of his or her estate for IHT purposes when the Discounted Gift Scheme is set up with the balance falling outside of the estate for IHT calculations after 7 years, but has allowed themselves to maintain access to an income from the funds for the rest of their lives with access, at the trustees discretion, to the money for their intended beneficiaries should a need arise.

If you would like to find out more about Discounted Gift Schemes, please feel free to contact me for a no obligation discussion or complete the Enquiry form.