I’m dealing with an estate where a Discounted Gift Trust was set up 5.5 years before the settlor’s death. It was set up with Old Mutual and was held in an onshore investment bond. It was paying a regular income of £416.66 per month to the settlor.
The original transfer value (2018) was £101,010, however, the Financial Advisor has sent me both the original transfer value as well as a lesser figure of £79,297 which she is calling “Probate Value,” settlor died in 2023.
I’ve never dealt with one of these, particularly not where the settlor died within 7 years. The Settlor’s full NRB was available when the original transfer was made, however, I’m unsure when adding this to my IHT403 whether or not I should be adding the original £101,010 figure or the £79,297 given that it’s a failed CLT.
Any assistance or thoughts are appreciated (and I apologise if this seems like a stupid question!).
The settlor should have received written confirmation from the bond provider of the value of the DGT for IHT purposes when it was set up. If this cannot be located, my thoughts are as follows:
With a discounted gift trust, the amount actually invested is discounted to take account of the actuarial value of the income stream retained by the settlor – the transfer of value for IHT purposes being the net amount, reflecting the perceived reduction in value of the settlor’s estate at the time of the gift.
Based on a monthly “withdrawal” of £416.67, if the withdrawal rate was 5% this would indicate an initial bond investment of £100,000, so the figure of £101,010 could be the actual sum the client invested in the bond. If so, it is likely the figure of £79,297 was for the transfer of value when the trust was created and is the figure that should be included on the IHT 403, which would fit with what the FA is advising.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
This is not a stupid question at all—Discounted Gift Trusts (DGTs) can be complex, especially when the settlor dies within seven years.
Retaining the right to an income devalues the gift provided that the settlor’s life expectancy was normal. You may be asked to prove that by producing contemporaneous underwriting evidence.
Thank you, Paul for your advice on this, it’s very clear.
I have, however, had a response from the Financial Advisor to say:
“This is a discounted gift trust but Quilter have confirmed that there was no initial discount applied. Also the Trust is an Absolute Trust (and not Discretionary) and therefore this would be classed as a PET and not a CLT. The total withdrawals are to do with what was paid out and nothing to do with any discount (as one did not apply to this plan). I do not know the reasons as to why there was no discount applied as I did not originally set up this policy.”
With this in mind, just so I am 100% certain, would you suggest that I proceed with the £101,010 figure?
Since 21 March 2006, many DGTs have ben set up as an absolute gift, subject to the donor having the right to receive regular withdrawals. The value of the gift for IHT reflects a discount for both the income stream retained by the donor and the fact the recipient cannot actually take ownership of the bond into which the gift is invested until the donor’s right to receive the withdrawals has ceased, generally on the death of the donor.
To my mind, this would appear to be how the DGT may have been structured and it may be the FA has not looked back at the paperwork around the creation of the arrangement, perhaps relying instead upon an incomplete understanding.
I suggest you ask the FA to let you have copies of the original fact find (a regulatory requirement when the DGT was “sold”) together with copies of the documentation for the DGT.
Without knowing what is meant by “Probate value”, I would be uncomfortable including this, or the initial value of the investment, when considering the IHT position.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals