In Depth Underwriting for Discounted Gift Trusts
Published / Last Updated on 11/05/2023
Discounted Gift Trust providers are starting to conduct much more in depth underwriting to establish a more accurate life expectancy forecast when offering discounts on investments within discounted gift trusts.
What is a Discounted Gift Trust (DGT)?
- You invest £100,000 via a life insurance investment bond inside a discounted gift trust.
- The trust we use is usually a ‘Bare Trust’ meaning it cannot be changed and you have put all the money in trust for your loved ones.
- You must survive for 7 years for the trust and 100% of the proceeds to be outside of your estate for inheritance tax purposes.
- In the meantime, HMRC accepts life expectancy forecast expectations but also an expectation that you have reserved rights of ‘income’ from the trust.
- E.g., You draw an income from the trust at 5% pa X £100,000 = £5,000pa.
- Your life expectancy is 10 years.
- Therefore, HMRC accepts that you have reserved a right to 5% pa and over a 10-year life expectancy, your reserved right of income is therefore 5% X 10 years = 50%.
- Therefore, you have gifted to trust and invested £100,000 in the trust with a reserved right of £50,000 i.e., 50%.
- HMRC will then allow a discount of 50% on the value of the gift to the trust i.e., the value of the gift for IHT purposes is 50% = £50,000 despite the value of the investment actually being £100,000.
- If you die the very next day, next month, next year or any time in the next 7 years, the value of the investment included in your estate will be £50,000 even if the value of the actual investment is £100,000 or even more with growth.
- You can devalue all your investments for IHT planning via a discounted gift trust overnight by 50% but loved ones will still inherit 100% of the value.
- This a fantastic way to reduce your IHT liability overnight but still have access to the ‘income’.
For more on DGTs, Watch: IHT Discounted Gift
Why Deeper Underwriting Now?
- HMRC’s published and accepted reserved right of income rate was set at 4.5% pa before up to the 30th April 2023.
- HMRC has now increased the reserved right of income rate to 6.75% pa from 1st May 2023.
- This is due to recent increases in interest rates and therefore gilt yields and annuity rates meaning that most people can now expect a higher level of income from their savings and investments in general.
Impact of 6.75% pa v 4.5% pa Reserved Right
- £100,000 invested, 4.5% pa reserved right, 10 year life expectancy = 45% reserved right from the £100,000 meaning you get a 55% discount i.e., £55,000 is immediately outside the estate for IHT purposes from day 1.
- £100,000 invested, 6.75% pa reserved right, 10 year life expectancy = 67.5% reserved right from the £100,000 meaning you get a 32.5% discount i.e., £32,500,000 is immediately outside the estate for IHT purposes from day 1. Your discount for IHT purposes has been reduced.
Countering Any Reduced Discount
- DGT providers are now targetting more in depth underwrting of your health, fitness, medical conditions, smoker/non-smoker status etc. to get a more accuarate life expectancy forecast.
- E.g. Your life expectancy is fully underwritten and forecast now to be 7 years. £100,000 invested, 6.75% pa reserved right, 7 year life expectancy = 47.25% reserved right to income from the £100,000 meaning you get a 52.5% discount i.e., £52,500 off the value of the investment immediately outside your estate for IHT purposes from day 1 rather than 32.5% discount if your life expectancy was still judged to be 10 years.
