Glossary · UK
What is Discounted Gift Trust (DGT)?
An IHT planning trust where you give away a lump sum but retain fixed regular withdrawals, with only the discounted value counting as a chargeable transfer.
Full Definition
A Discounted Gift Trust is an IHT planning arrangement where an individual (the settlor) places a lump sum into a trust while retaining the right to receive fixed regular payments (withdrawals) for the rest of their life. The retained rights -- known as the carve-out -- are valued actuarially based on the settlor's age, health, and the size of the regular payments. This valuation is the "discount." The initial gift to the trust is reduced by the discount for IHT purposes: for example, a GBP 500,000 investment with a GBP 200,000 actuarial value of retained income creates only a GBP 300,000 chargeable lifetime transfer (CLT) immediately. After 7 years from the date of the trust, the CLT falls outside the estate entirely under the 7-year rule. The retained income element -- the actuarial value -- remains in the estate until the settlor's death. DGTs are most effective for older people in reasonable health who need a regular income stream and want to reduce IHT on surplus capital. The investment inside the trust grows free of the settlor's estate from day one. Policies are typically invested in investment bonds (onshore or offshore), which simplifies trust taxation and provides the 5% annual withdrawal facility to meet the settlor's income need. HMRC has challenged some DGT structures where the discount calculations were not genuinely actuarial, or where the settlor's health was materially worse than declared at outset. Any discount must be reported to HMRC using form IHT100 if the CLT exceeds the available nil-rate band (GBP 325,000 for 2026/27). Regulated financial advice is essential before implementing a DGT.