Discounted Gift Trust. URN or UTR HMRC registration?

lohr500

My father passed away in November last year and at that point I discovered he had set up a Discounted Gift Trust back in 2012.

The paperwork in his files contained some communication with his IFA at the time which suggested that the funds in the trust would not be subject to IHT. He and the IFA parted company several years ago after my father moved most of his investments into cash savings.

The trust was set up with my father as policyholder and my mother, my brother and I as trustees. My mother receives a monthly income from the trust, equal to 5% of the initial investment.(Which I believe is/was the maximum allowed under the IHT exemption logic. I could be wrong on this). On the death of my mother, the residual value in the trust is split between myself and my brother.

On further investigation and after calling the HMRC trust helpline today, it turns out that the trust was never registered with the HMRC.

By the time the HMRC rules had changed on registering trusts in 2021, my father was without an IFA and either never realised the trust needed registering, or concluded it didn't need registering.

Either way, my understanding is that it needs to be registered. I have read a couple of previous posts on this and tried to decipher the HMRC guidance, but as a layman, the technical nuances of the different types of trust are beyond me.

Based on the description of the trust I have outlined above, would anyone know if I should register it as a taxable trust with a UTR number, or a non-taxable trust with a URN number?

As ever, thanks in advance for any input.

poseidon1

Follow article might assist-

https://www.saffery.com/insights/articles/trust-registration-service/#:~:text=In%20particular%2C%20bare%20trusts%2C%20which,not%20comply%20with%20the%20legislation.

In the past if the underlying trust of your mother's DGT was a mere bare trust, this would have been exempt from registration.

However as indicated in the article and as a result of enhanced UK money laundering procedures, most bare trusts are now caught. So regardless of the type of trust implemented in favour of you and your brother as ultimate beneficiaries on death, the DGT must be registered with HMRC.

However registration as a taxable or non taxable trust depends on whether the DGT was set up as a joint settlor trust or a single settlor trust. If single settlor ( your father by himself ) any future investment bond taxable gain falls on the trust fund therefore a taxable trust.

However, if established as a joint settor trust with your mother, any future bond gains fall to be taxed on your mother personally ( as surviving settlor ), and not on the trust fund. Therefore non taxable trust requiring a URN.

lohr500

Thank you for your reply @poseidon1

Firstly, I have looked through the original paperwork and it shows my father and mother.as joint settlors.
So on this basis a non taxable trust requiring a URN.

Secondly, forgive my ignorance, but what would the definition be of "any future bond gains" and how would the tax on these be calculated from my mother's point of view?

The trust was set up with a lump sum back in 2012 and has provided a fixed monthly income paid to my mother at an annualised 5% of the original lump sum. Because my father was not actively managing the choice of investment fund, the fund value now sits at 82% of the start value. I am addressing this with my mother and brother and I am suggesting we switch to a slightly higher risk fund which shows better 1/3/5/10 year annualised performance than the current fund.

Finally, on the death of my mother, do you know what the taxation situation would be for my brother and I as the ultimate beneficiaries?

Sorry for all the questions and no offence will be taken if you tell me to seek specialist paid for advice.
I just want to make sure that there are no surprises in the pipeline with this DGT and that we comply with whatever registration and taxation implications there may be.

Thanks again.

poseidon1

At the heart of the DGT is a straight forward investment bond, the taxation of which will be pretty much the same as the investment bonds we have discussed in your previous posts in the past.

However, as you have indicated that the level of mandatory withdrawals ( 5% per annum) has over the years noticeably exceeded the growth of the bond assets, it is now 14 years later only worth 82% of the original capital invested. This does not mean the trust has had no gain at all, merely that withdrawals have outstripped the modest gains. This being the case, the first time a chargeable event will arise is after the first 20 years of withdrawals in 2032, when your mother will then have had her 20 years of tax deferred withdrawals.

From year 21 onwards there will be automatic chargeable events on a proportion of your mother's ongoing 5% withdrawals.

As with the other bonds your mother held, top slicing relief will be available to possibly erase an income tax charge, depending on her other sources of taxable income at that time. So best to be aware of this when considering her basic rate income tax thresholds from that point on.

On her eventually death, and assuming the bond terminates by reason of her passing, there will be a final bond chargeable event attributable to her estate but with topslicing relief available to determine if an actual income tax liabilty arises.

As to what remains of the bond proceeds, that then passes to you and your brother IHT free as originally intended.

lohr500

A lot to absorb and consider. But thanks to your help I am now much wiser on the details of the DGT and the implications for taxation.

I'm not sure my father was aware of the implications and sadly he is no longer with us to discuss them.
With hindsight I should have asked him more about the DGT and digged deeper into it when we ran through his finances several years ago. But based on his simple explanation at the time, he was under the impression that there would be no tax burden on either my mother, or ultimately my brother and I.

After picking up on the key elements in your reply I can now do some more focussed reading on the topic. And I am now aware of the need to consider chargeable events as time progresses.

I am sure the 1st thing to do is register the trust with HMRC so we are compliant in that respect. I will attend to this without delay.

I really appreciate the time you have taken with your replies.

EDIT : Trust now registered with HMRC and URN obtained.

poseidon1

The danger with DGTs is if the preselected withdrawal percentage is too high relative to the underlying investment bond asset mixed.

Typically, when advising clients in the past 5% would have been considered ambitious and we would advise our clients to consider withdrawal levels at nearer 3 to 4 % of the original capital invested.

I note you are looking to switch funds to something with more aggressive growth potential, to help counteract your mother's high level of withdrawals, which I note from a previous post is fixed at £700 per month. Hopefully this might halt the trust fund erosion, even if it does not reverse it.

lohr500

I suspect without going for a much higher risk growth strategy, we will struggle to fully reverse the erosion or even see it going above the initial investment.

On a scale of 1 to 6, the current fund is 3. We are looking at a risk 4 fund which has performed better and still has aow maintenance charge.

My primary objective is to ensure that the monthly payment to my mother is not compromised (as far as it can be with any investment fund). With no further growth in the fund, or even moderate losses, there should be sufficient cash there to meet the monthly payout and maintain her standard of living.

But increasing the risk profile may help boost the fund which will be a bonus for my brother and I when she does pass away.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81971911#Comment_81971911

That's the best you can do since under the very strict terms of the DGT, your mother's pre-selected level of monthly withdrawals cannot be altered in anyway to avoid the entire IHT efficiency of the scheme being compromised.

Tweaking the risk rating upwards is far as you can go to help redress the erosion.