Simple question about Discounted gift trust

mike_question

I have been talking to a financial adviser who is recommending my wife and I make a gift for our children via an Investment Bond scheme with a "discounted gift trust" which may have some benefits although a proportion of the gift is still liable to trigger IHT on death within 7 years

I understand this is fairly mainstream scheme and I have understood most of what he has said. But I have asked the following simple question more than once and not really got a clear answer. Can anyone help with an answer please?

If we do this on a joint basis then on the first death what happens as regards IHT triggers? I got the impression that he was suggesting that nothing happens on the first death so the spouse would simply inherit the whole of the Nil Rate Band. This would be good because it reduces the risk of the gift failing the 7year rule (we would both have to die within 7 years for it to trigger).

But I have my doubts that this is right! Is it not the case that the original investment is treated as being made half by each of us so on the first death, half of the gift is notionally added back to that person's estate and would then eat into that person's Nil Rate Band. That is therefore much the same as gifting cash without a trust. 

I know I'm nibbling at a big subject here but if anyone can help with this simple point, it would be appreciated.

Marcon

mike_question said:

I have been talking to a financial adviser who is recommending my wife and I make a gift for our children via an Investment Bond scheme with a "discounted gift trust" which may have some benefits although a proportion of the gift is still liable to trigger IHT on death within 7 years

I understand this is fairly mainstream scheme and I have understood most of what he has said. But I have asked the following simple question more than once and not really got a clear answer. Can anyone help with an answer please?

If we do this on a joint basis then on the first death what happens as regards IHT triggers? I got the impression that he was suggesting that nothing happens on the first death so the spouse would simply inherit the whole of the Nil Rate Band. This would be good because it reduces the risk of the gift failing the 7year rule (we would both have to die within 7 years for it to trigger).

But I have my doubts that this is right! Is it not the case that the original investment is treated as being made half by each of us so on the first death, half of the gift is notionally added back to that person's estate and would then eat into that person's Nil Rate Band. That is therefore much the same as gifting cash without a trust. 

I know I'm nibbling at a big subject here but if anyone can help with this simple point, it would be appreciated.

You describe this as 'a simple question', so it's worrying that you are paying a professional adviser and they apparently can't answer it, or answer it correctly. Understanding 'most' of what has been said isn't enough; an adviser needs to be able to explain everything you want to know. If you have doubts that they are right, maybe taking advice from then at all isn't a good idea? 

There's a lot of information out there, which might help the nibbling process. Have a look at https://techzone.abrdn.com/public/iht-est-plan/Tech-guide-discounted-gift which should help clarify, or https://www.broomconsultants.com/imgs/1___discounted_gift_plan_qa_2021735.pdf.

Keep_pedalling

Why not a straightforward gift of cash?

poseidon1

mike_question said:

I have been talking to a financial adviser who is recommending my wife and I make a gift for our children via an Investment Bond scheme with a "discounted gift trust" which may have some benefits although a proportion of the gift is still liable to trigger IHT on death within 7 years

I understand this is fairly mainstream scheme and I have understood most of what he has said. But I have asked the following simple question more than once and not really got a clear answer. Can anyone help with an answer please?

If we do this on a joint basis then on the first death what happens as regards IHT triggers? I got the impression that he was suggesting that nothing happens on the first death so the spouse would simply inherit the whole of the Nil Rate Band. This would be good because it reduces the risk of the gift failing the 7year rule (we would both have to die within 7 years for it to trigger).

But I have my doubts that this is right! Is it not the case that the original investment is treated as being made half by each of us so on the first death, half of the gift is notionally added back to that person's estate and would then eat into that person's Nil Rate Band. That is therefore much the same as gifting cash without a trust. 

I know I'm nibbling at a big subject here but if anyone can help with this simple point, it would be appreciated.

DGTs are one of more effective IHT mitigation arrangements linked to life company investment bonds since they do what the say on the packet ie discount the value of your outright gift into trust.

However assuming you are using the absolute trust format in favour of your chosen  beneficiaries you and wife still have to survive the requisite 7 year periods for each of your gifts to fall out of account and  eventually revive your respective nil rate bands for future use or transfer to each other.

 A DGT is not a magic bullet that can make the 7 year rule disappear, but if early death does occur at least the assessable value  that uses the nil rate band, is less than the monetary value actually gifted.

 The gifts maybe discounted, but in the context of an absolute trust they remain  potentially exempt transfers for iht purposes.

Hopefully you did not elect to use a discretionary trust structure for the underlying trust, since more complex iht ramifications arise both on death, and over the ensuing 10 yearly anniversaries of the trust creation

Incidentally, if you take the trouble to read the abrdn link Macron sent you, you will see under the subheading ' Calculating  the discount' it is not a simple 50:50 arrangement. Each gift is ascertained actuarially based on individual life expectancies in the case of joint settlements. 

If none of these complexities were properly conveyed to you by the adviser ( in writing) or in technical blurb from the life company concerned, then you had insufficient information to make an informed decision.



.

mike_question

Thanks for the replies.

I have scoured every inch of the websites mentioned above as well as many others and none of them specifically clarifies my question about joint gifts.

I do understand all the points about the discount portion etc etc and the functioning of the 7 year rule

But my question is specifically about the gift being a joint one to an absolute discounted gift trust and the IHT treatment on death within 7 years

The chance of one or other of us dying within 7 years has to be recognized as a possibility, whereas both of us dying within 7 years would be less likely (as well as being very bad luck).

The adviser is saying that on the first death nothing happens and IHT issues are dealt with upon the second death.
This sounds like a very good benefit because hopefully there's a good chance that at least one of us will get through the next 7 years and it doesn't matter for this purpose which one of us it is. Thus, on the second death after 7 years, the gift will be fully exempt from IHT. 

But I'm not sure the adviser is right!

Here's the question: Is the joint gift actually treated as 2 separate gifts of half each by my wife and I? So, upon the first death within 7 years that person's gift would then become a failed PET and will use up part of that person's NRB?  

Can anyone confirm this or direct me to where it may be clarified in any of the available literature.

Thanks in advance.

QrizB

mike_question said:

I have been talking to a financial adviser who is recommending my wife and I make a gift for our children via an Investment Bond scheme with a "discounted gift trust" which may have some benefits although a proportion of the gift is still liable to trigger IHT on death within 7 years

How old are you both now? Do you expect to live another seven years?

Is this a Financial Advisor from one of the tied firms (like SJP or Fisher) or an Independent Financial Advisor?

FAs like selling trusts and investment bonds, it helps them make their yacht payments ...

DRS1

mike_question said:

Thanks for the replies.

I have scoured every inch of the websites mentioned above as well as many others and none of them specifically clarifies my question about joint gifts.

I do understand all the points about the discount portion etc etc and the functioning of the 7 year rule

But my question is specifically about the gift being a joint one to an absolute discounted gift trust and the IHT treatment on death within 7 years

The chance of one or other of us dying within 7 years has to be recognized as a possibility, whereas both of us dying within 7 years would be less likely (as well as being very bad luck).

The adviser is saying that on the first death nothing happens and IHT issues are dealt with upon the second death.
This sounds like a very good benefit because hopefully there's a good chance that at least one of us will get through the next 7 years and it doesn't matter for this purpose which one of us it is. Thus, on the second death after 7 years, the gift will be fully exempt from IHT. 

But I'm not sure the adviser is right!

Here's the question: Is the joint gift actually treated as 2 separate gifts of half each by my wife and I? So, upon the first death within 7 years that person's gift would then become a failed PET and will use up part of that person's NRB?  

Can anyone confirm this or direct me to where it may be clarified in any of the available literature.

Thanks in advance.

I think @poseidon1 sort of answered this question by saying "you and wife still have to survive the requisite 7 year periods for each of your gifts to fall out of account".  I read that as yes you are making separate gifts of half each (although with the possibly different discounts one gift may be larger than the other).  And yes each one of you would have to survive 7 years for that gift to not become a failed PET and use up part of your NRB.

What I don't understand is whether the fact that your spouse would still have an interest after your death means the spouse exemption would apply.  If it does then surely it is just like your spouse inheriting everything on your death and the whole of your NRB is available to be used on her death?  I confess I do not know what an absolute trust actually says - does it give you and your spouse a life interest in the whole of the trust?  I am guessing the answer is no.

poseidon1

DRS1 said:

mike_question said:

Thanks for the replies.

I have scoured every inch of the websites mentioned above as well as many others and none of them specifically clarifies my question about joint gifts.

I do understand all the points about the discount portion etc etc and the functioning of the 7 year rule

But my question is specifically about the gift being a joint one to an absolute discounted gift trust and the IHT treatment on death within 7 years

The chance of one or other of us dying within 7 years has to be recognized as a possibility, whereas both of us dying within 7 years would be less likely (as well as being very bad luck).

The adviser is saying that on the first death nothing happens and IHT issues are dealt with upon the second death.
This sounds like a very good benefit because hopefully there's a good chance that at least one of us will get through the next 7 years and it doesn't matter for this purpose which one of us it is. Thus, on the second death after 7 years, the gift will be fully exempt from IHT. 

But I'm not sure the adviser is right!

Here's the question: Is the joint gift actually treated as 2 separate gifts of half each by my wife and I? So, upon the first death within 7 years that person's gift would then become a failed PET and will use up part of that person's NRB?  

Can anyone confirm this or direct me to where it may be clarified in any of the available literature.

Thanks in advance.

I think @poseidon1 sort of answered this question by saying "you and wife still have to survive the requisite 7 year periods for each of your gifts to fall out of account".  I read that as yes you are making separate gifts of half each (although with the possibly different discounts one gift may be larger than the other).  And yes each one of you would have to survive 7 years for that gift to not become a failed PET and use up part of your NRB.

What I don't understand is whether the fact that your spouse would still have an interest after your death means the spouse exemption would apply.  If it does then surely it is just like your spouse inheriting everything on your death and the whole of your NRB is available to be used on her death?  I confess I do not know what an absolute trust actually says - does it give you and your spouse a life interest in the whole of the trust?  I am guessing the answer is no.

Yes pretty much sums up my points.

However no issue with the surviving spouse continuing to enjoy her benefit. For trust tax purposes the joint  income rights were  'carved out'  of the trust from outset, so do not constitute either a reservation of benefit when both were alive, or a later  'interest in possession ' enjoyed by the survivor after the first death. The absolute trust itself is  for the children, neither husband or wife are direct beneficiaries of the trust. 

It is a very clever  'have your cake and eat it' trust construct, which ( unusually) has been refined with the direct technical input of HMRC over the last few decades.

For estates considerably above the £1 million mark with plenty of liquid assets,  DGTs do have much to commend them if set up with scrupulous adherence to HMRC criteria ie full underwriting and ascertainment of individual discounted gift factors.

mike_question

Thanks again. I note and understand the various points made