Discounted Gift Trust -- IHT Planning 2026

For people who need a regular income from their capital but also want to reduce the inheritance tax bill on their estate, a discounted gift trust (DGT) can be a highly effective solution. It combines an immediate IHT reduction through actuarial discounting with the prospect of removing the remaining gifted amount from the estate over seven years.

What Is a Discounted Gift Trust?

A discounted gift trust is a life assurance-based financial planning arrangement. You invest a lump sum into an investment bond held within a trust. You retain the right to receive fixed regular withdrawals -- typically expressed as a percentage of the initial investment each year -- for the rest of your life. The remainder of the investment is gifted to the trust for the benefit of your chosen beneficiaries.

The key feature is the discount. An actuary calculates the present value of your retained income stream, taking into account your age, state of health, the withdrawal rate, and applicable actuarial tables. This calculated value is subtracted from the amount you invested, and only the balance -- the discounted amount -- counts as the chargeable gift for IHT purposes.

Because the retained income stream has a measurable value, you are not treated as having given away 100% of the investment. You are treated as having given away only the part you genuinely surrendered. This is the legal and actuarial basis of the discount.

How the Discount Is Calculated

Suppose you invest GBP 200,000 and elect to receive withdrawals of 5% per year, which is GBP 10,000 per year. An actuary values your right to receive GBP 10,000 per year for the rest of your life based on your age and health. If you are 70 years old and in average health, this income stream might be valued at GBP 60,000 to GBP 80,000.

The chargeable gift is therefore GBP 200,000 minus GBP 70,000 (the actuarial value of the income), which equals GBP 130,000. For IHT purposes you are treated as having made a gift of GBP 130,000, not GBP 200,000. The GBP 70,000 discount falls outside your estate immediately on day one, with no seven-year clock.

The exact discount percentage depends on your age, sex, health, and the chosen withdrawal rate. Older investors with higher withdrawal rates and poorer health receive larger discounts. Some providers offer enhanced medical underwriting where, if you have a life-shortening condition, the actuarial discount can be substantially higher.

PET Version vs CLT Version

DGTs come in two main structural forms, which have different IHT treatment for the gifted element.

The bare trust (absolute) version creates a potentially exempt transfer (PET) of the discounted gift amount. A PET is entirely outside your estate after seven years with no IHT consequence during the seven-year period -- as long as you survive. However, a bare trust means the beneficiaries are fixed at outset and cannot be changed. Each named beneficiary has an absolute entitlement to their share from day one.

The discretionary trust version creates a chargeable lifetime transfer (CLT) of the discounted gift amount. The trustees have discretion over how to distribute among a class of potential beneficiaries, which gives much greater flexibility. However, a CLT uses up part of your nil-rate band. If the discounted gift amount is within your remaining NRB (GBP 325,000 in 2026/27), there is no immediate IHT charge. If it exceeds the NRB, a lifetime IHT charge of 20% applies on the excess at outset, and periodic charges apply every 10 years thereafter.

For most investors, the discounted gift amount is within the NRB and the discretionary trust version creates no immediate IHT charge, while providing full trustee flexibility over distribution.

The Seven-Year Rule on the Chargeable Amount

The discounted gift amount -- the value treated as the gift -- follows the normal seven-year rule. If you survive seven years from the date of the trust being established, the entire chargeable gift falls outside your estate with no IHT consequences.

If you die within seven years, taper relief may apply to reduce the IHT on the gift. Taper relief reduces the tax on failed PETs and CLTs as follows: no reduction in years one to three, 20% reduction in years three to four, 40% in years four to five, 60% in years five to six, and 80% in years six to seven.

The income withdrawals you receive are not gifts for IHT purposes -- they are simply you taking back what you retained. They remain in your estate as cash once received, so spending them (rather than saving them) is important for ongoing IHT planning.

Practical Example -- GBP 200,000 Investment

David is 68 years old and in reasonable health. He has an estate worth GBP 900,000 and wants to reduce his IHT liability. He does not need access to his capital but would like GBP 8,000 per year in income.

He invests GBP 200,000 into a discretionary DGT with a 4% per year withdrawal rate (GBP 8,000 per year).

An actuary values his right to receive GBP 8,000 per year for life at GBP 72,000. The chargeable gift (the CLT) is therefore GBP 200,000 minus GBP 72,000, which equals GBP 128,000.

David has never made previous chargeable transfers, so his remaining NRB is GBP 325,000. The CLT of GBP 128,000 is well within this, so there is no immediate IHT charge.

The IHT position on day one:

• GBP 72,000 discount -- outside estate immediately
• GBP 128,000 CLT -- outside estate after seven years (assuming David survives)

If David survives seven years, the total GBP 200,000 is outside his estate. The IHT saving at 40% is GBP 80,000. The investment growth within the trust also accrues entirely outside his estate.

If David dies after three years, the GBP 72,000 discount is already saved. The GBP 128,000 CLT would be added back into the estate for IHT calculation, but taper relief would not yet apply. The trust value (including growth) passes to beneficiaries without further IHT because the trustees hold the settled property.

Medical Underwriting -- Enhanced Discounts

Standard DGTs use actuarial tables based on average population mortality. If you have a significant health condition that reduces your life expectancy, many providers offer medical underwriting. A medical questionnaire and sometimes a GP report is completed, and the actuary adjusts the discount upwards to reflect the shorter expected income period.

For example, a 68-year-old with a serious heart condition might receive a discount of GBP 120,000 on a GBP 200,000 investment instead of GBP 72,000, meaning the chargeable gift is only GBP 80,000. This substantially increases the immediate IHT saving.

Medical underwriting does not disqualify you from setting up a DGT -- in fact, poorer health increases the discount and makes the arrangement more attractive from an IHT perspective.

Investment Performance Within the Trust

The investment bond within the trust grows in a life assurance fund. Growth accumulates tax-deferred within the bond. Your annual withdrawals are taken as partial surrenders of the bond and are subject to the life assurance taxation rules -- specifically the 5% per year cumulative allowance, which permits withdrawals of up to 5% per year of the original investment without triggering an immediate income tax charge (the gain is deferred until the bond matures or is surrendered).

If your withdrawals exceed 5% per year on a cumulative basis, a chargeable event gain may arise. For DGTs structured with a 5% withdrawal rate, this is typically not an issue.

Any growth within the trust benefits your chosen beneficiaries and is entirely outside your estate from day one of the trust being established. This is a significant long-term advantage, particularly where the underlying investment grows substantially.

Who Benefits Most from a DGT?

Discounted gift trusts are typically most effective for investors who meet most of the following criteria. They are aged 60 or over -- younger investors get smaller discounts because their income stream is expected to last longer and has a higher actuarial value. They have a surplus income need but do not require access to the capital lump sum. They have an IHT problem -- their estate exceeds the available NRB and RNRB thresholds. They are in reasonable or poor health, which increases the discount.

DGTs are not suitable for investors who may need to access their capital in an emergency, because the gift into trust is irrevocable. They are also not suitable as a primary emergency fund, and independent financial advice should always be taken before establishing one.

Limitations and Points to Watch

The income level is fixed at outset and cannot be changed. If your income needs change -- for example due to care costs or inflation -- the DGT cannot be adjusted. This inflexibility is the most significant practical downside.

The discount is calculated once at outset. There is no ongoing adjustment. If you live considerably longer than average, the discount may turn out to have undervalued your income stream, though this does not affect the IHT treatment already agreed.

HMRC has confirmed that properly structured DGTs achieve the intended IHT treatment, but they have challenged poorly structured arrangements. Using a reputable provider and obtaining professional advice is essential to ensure HMRC does not challenge the discount calculation or trust structure.

The trust is subject to relevant property trust tax rules if structured as a discretionary trust, meaning periodic charges every 10 years and exit charges when assets leave the trust. For most DGTs these charges are modest relative to the IHT saving achieved.