What is a discounted gift trust and how does it reduce IHT?

Full answer

A discounted gift trust (DGT) is an estate planning structure combining a gift into trust with a retained right to receive regular fixed income payments from the trust for the rest of your life. The key IHT benefit is the immediate 'discount' on the chargeable transfer. How it works: you invest a lump sum (e.g. GBP 200,000) into the trust. An actuary calculates the present value of your retained income payments (the 'carve-out') based on your age, health, the payment amount, and investment assumptions. Suppose the actuary values the retained income at GBP 60,000. You have made a chargeable lifetime transfer (CLT) of only GBP 140,000 (GBP 200,000 minus GBP 60,000 discount), not GBP 200,000. This reduces the immediate IHT exposure. After 7 years, the GBP 140,000 CLT falls outside your estate entirely. The retained income right (GBP 60,000) remains in your estate as you continue to receive it, but diminishes as payments are made. The size of the discount depends mainly on age and health. A 70-year-old in good health retaining income of 5% of the fund per year might receive a discount of 25-40%. A 60-year-old retaining larger payments could get a higher discount. Impaired life cases (poor health) may get a lower discount because life expectancy is shorter, so fewer payments are expected. Important: you cannot access capital from the trust (unlike a loan trust). The income payments are fixed and you must stick with them. If the investments underperform, the trust may run out of capital to pay your income -- a real risk with low-growth periods. As a discretionary trust, the DGT is subject to the relevant property regime: potential entry charge on amounts above the nil-rate band (GBP 325,000 for 2026/27), 10-year periodic charges (max 6%), and exit charges. These are usually modest compared to the IHT savings. Always get regulated financial advice and a whole-of-market comparison before setting up a DGT.

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