Discretionary Discounted Gift Trusts

Good morning all,

I was wondering whether anyone had any views on this, as I have to admit I’ve very little experience with these plans:

My client has three ‘discretionary discounted gift trusts’ - set up in July 2001, November 2006 and May 2007. Her attorneys were sent paperwork last year to say there “may be a 10 year charge” re the 2007 plan, however they did nothing and are now concerned.

The 2006 and 2007 trusts are certainly within the RPT regime and subject to 10 yearly charges, and I wanted to check whether you agreed that the 2001 plan was also subject to these - it too is described as a discretionary discounted gift trust and mirrors the other two in all but date. It looks very much like your ‘standard’ DGT and the Settlor receives monthly capital payments. They are all St James’s Place plans.

The 10-year value of 2007 DGT was low (£108,607.00 with likely no ‘discount’ as the settlor is very, very unwell and in her late 80s) however if both the 2001 and 2006 DGTs are CLTs (and within 7 years prior to the 2007 trust) then there’s only c.£42,000 NRB available and so just under a c.£4,000 10 year charge, on my [crude] calculations.

Am I approaching this correctly?

I would obviously like to view the 2001 DGT as a PET, but I just don’t think it can be as its definition is discretionary.

Any thoughts would be much appreciated. Thank you.

Georgina Sinha
Calibrate Law

Prior to 2006 most life company standard trust documentation created interest in possession trusts rather than discretionary trusts, in which case the creation of the 2001 trust would have been a PET. Bear in mind also that the amount of the transfer of value made in 2001 may have been quite low because of the discount. The cumulative total of prior chargeable transfers made by the settlor must have been considered by the financial adviser who established the 2007 trust because otherwise how would he know whether or not a lifetime IHT charge was payable? Perhaps your client’s attorneys should ask St James’s Place for a copy of the advice given to the client in 2007.

Paul Davies

Paul - thank you for your comments. I’ve since received documents from SJP’s underwriting team who have confirmed the discounted CLTs going back to 2001 (sadly no retention of any of the 2007 advice, apparently).

Georgina Sinha
Calibrate Law

I would reinforce what Paul has said. Life company trusts have been my bread and butter for over 25 years and I have never seen a discretionary DGT created by a life company prior to 2006.

Life companies almost always used flexible power of appointment trusts. This was because the invested amount was unlimited by the CLT legislation, they still provided flexibility to amend the beneficiaries, and as they almost always held bonds the punitive trustee rate of tax could be avoided. If you are being told that the transfer to the 2001 trust was a CLT I would ask for a second opinion. I have frequently received incorrect information from the servicing teams in life companies.

Ian Dyall
Tilney Financial Planning Ltd

Hi Georgina, my apologies for coming late to this. firstly I would repeat Paul’s point that the actual CLT values for the 2001 and 2006 schemes are likely to be less than the amount of the premium - due to the discounts that may have been available at the time. I am not sure if you have been provided the values for the CLTs or just the premiums?
Also the value required at the 10 year periodic review is the open market value of the relevant property - which factors in not just the “discount” but also an assurance factor that reflects the fact that the settlors cannot realise the value of the underlying property until the settlor dies. I appreciate your comment regards settlor’s age and state of health but this may also reduce the likelihood of a tax charge - links to the HMRC’s 2013 guidance on DGT valuations (including valuations for periodic reviews): https://www.gov.uk/government/publications/revenue-and-customs-brief-22-2013-discounted-gift-schemes/revenue-and-customs-brief-22-2013-discounted-gift-schemes--2#updated-guidance-on-the-calculation-of-transfer-values-when-a-discounted-gift-scheme-is-effected
You may find the examples of particular interest: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/356781/examples_of_how_the_value_of_relevant_propery_is_calculated.pdf

Barry Foster
Utmost Wealth