Discounted Gift schemes and payment of income into a trust


(Anne Slater-Brooks) #1

I have come across a situation where a DGT has been set up for a client who does not need the income. The income is currently being paid out but straight into a trustee bank account.

Given that the income under a DGT is the property of the settlor, I believe this makes each payment kinto the trustee bank account a further PET. Can anyone else shed light on whether this is the case, and offer any advice as to what could be done to rectify it. I am thinking to simply make future payments payable to another account?

Anne Slater-Brooks
Ingenious


(John Cartlidge) #2

Interesting point. My instinct, given on the face of it the settlor does not require the income, they are regular gifts out of income that do not diminish lifestyle and so are exempt gifts:

As ever, record keeping a must, not least a statement to the effect the monies received from the arrangement (which is technically a return of capital, not ‘income’) is a habitual gift.

As an aside, problems I have seen with DGT with death within 7 years is the original life proposal was not fully underwritten; Post mortem within 7 years HMRC have then requested full medical underwriting info / history as at time of the gift or will not accept the gift as a deduction from the estate. My experience of the financial advice world is such that I would venture underwriting is the exception rather than the norm, although death within 7 years will of course occur in only a portion of cases.

John Cartlidge
Campion Solicitors


(Simon James Northcott) #3

The 5% withdrawals are capital for trust and iht purposes, and whether you can pay them out, and who to, will depend on the powers you have over capital. If you do pay them out, they may be subject to iht. They are only income for income tax purposes.

Simon Northcott


(Paul Saunders) #4

As Simon says, the withdrawals from a DGT are capital, not income, and so would not be treated as gifts out of the settlor’s income.

A concern may be that the settlor never really intended to receive the regular payments to which they are entitled. In which case, HMRC might assert the creation of the scheme is a sham (as it was never intended to operate in the manner set out on paper), or that there are associated transactions, as the subsequent withdrawals are retained in the trust.

My view is that the withdrawals due to the settlor should be paid over to them soonest, and future payments paid over as they are received.

Once in the settlor’s hands, if they have an annual income surplus (ignoring the payments from the DGT) then they could establish a regular pattern of gifts out of income in order to reduce the build-up of their estate. Whilst a little more fiddly, it has more chance of passing HMRC scrutiny.

Paul Saunders


(Anne Slater-Brooks) #5

Hi John, I considered gifting out of normal income but because the investment asset of a discounted gift scheme is an investment bond, the withdrawals of 5% are not in fact income, but return of capital.

As such, they cannot be used in conjunction with that relief. Sadly her other income is insufficient to cover the amount which is coming out of the DGT and then immediately returning to a trustee bank account

Anne Slater-Brooks
Ingenious


(Tim Gibbons) #6

Some years ago I had a client who had taken out (I felt it had been mis-sold) a DGT in his mid 50s. By the time I was consulted he was at retirement age and had adequate pension resources.

I worked out a scheme under which the trustees advanced the fund to his minor grandchildren absolutely (it was intended to be used to fund school fees) and the client then released his entitlement to the continuing withdrawals. This was accepted by the insurance company. Because it increased the value of that which was given on bare trusts to grandchildren it should, I reasoned, be a PET if the client was to die within 7 years. So far he has continued in good health, so it hasn’t been tested.

Initially I was very doubtful because the general expectation is that once set up these plans cannot be altered, but I can’t see any flaw in the principle.

Tim Gibbons


(anthony.nixon) #7

This one has always intrigued me. Withdrawals from single premium investment bonds are sold as income and are liable to income tax.

We all know that, in one sense, they are repayments of the original investment, but is it absolutely certain they are not “income” within IHTA s21?

In this case I would want to argue the issue with HMRC, just as I would in a case where an individual had invested all his savings in investment bonds, was living from the “income” they provided but decided to give some of it away.

Anthony Nixon
Irwin Mitchell Private Wealth


(Lee Blackshaw) #8

I’ve always treated as capital but recall Peter Twiddy’s view that it may qualify under s21 - see https://www.taxationweb.co.uk/tax-articles/inheritance-tax-iht-trusts-estates-capital-taxes/normal-expenditure-out-of-income-and-investment-bond-withdrawals.html

I’m not sure if that remains the view of HMRC.

Lee Blackshaw
Blackshaw Tax Ltd


(Paul Saunders) #9

To my knowledge, HMRC routinely dismisses claims for s.21 IHTA to apply where the existence of “surplus income” is reliant upon withdrawals from an investment bond. In each case I have seen, HMRC states that whilst the withdrawals are taxed as income, they are not income in the hands of the recipient. This applies whether the cash flow arises from a DGT or the individual holding an investment bond personally.

Paul Saunders