The discounted gift trust 14 Mr and Mrs Owen are aged 65 and 62 respectively. They are both in good health for their age. They have a joint estate of around £1,100,000. They wish to reduce their potential IHT liability and have £100,000 available to invest. However, they do need to take regular monthly withdrawals to supplement their pensions but can afford not to have any further access to the investment. They would like their children, Michelle and Gary, to benefit from the trust fund upon their death. Their financial adviser recommends that they invest in a Collective Investment Bond subject to a discounted gift trust – bare version. Case study 2 This shows how the bare version of the discounted gift trust works for a joint settlor case. It assumes that the available nil-rate band and exemptions have already been used. Settlor’s fund – the ‘discount’ The value of Mr Owen’s right to his half of the £5,000 withdrawals each year is calculated taking account of his age and health. We estimate Mr Owen’s discount to be £36,775. Mrs Owen’s half is valued at £38,241. The total discount is £75,016. Residual fund – the discounted gift This is Mr and Mrs Owen’s halves of the investment less their discounts. For Mr Owen it is £50,000 - £36,775 = £13,225. For Mrs Owen it is £50,000 - £38,241 = £11,759. The total discounted gift is £24,984. This part of Mr and Mrs Owen’s investment is immediately outside their estates for IHT purposes. These are potentially exempt transfers (‘PETs’) and fall outside their estates after seven years. Mr and Mrs Owen request that they receive 5% of the investment each year, which equates to £5,000, paid monthly. Any growth in the bond will be free from IHT. Mr and Mrs Owen jointly invest £100,000 in a Collective Investment Bond . The bond is transferred into a discounted gift trust – bare version. How the trust works in practice