The discounted gift trust 18 Mr and Mrs Povey 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 expanding family 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 – discretionary version. Case study 2 This shows how the discretionary version of the discounted gift trust works for a joint settlor case. It also assumes that the available nil-rate band and exemptions have already been used. Settlor’s fund – the ‘discount’ The value of Mr Povey’s right to his half of the £5,000 each year is calculated taking account of his age and health. We estimate the discount to be £36,775. Mrs Povey’s half is valued at £38,241. The total discount is £75,016. Residual fund – the discounted gift This is Mr and Mrs Povey’s halves of the investment less their discounts. For Mr Povey it is £50,000 - £36,775 = £13,225. For Mrs Povey it is £50,000 - £38,241 = £11,759. The total discounted gift is £24,984. This part of Mr and Mrs Povey’s investment is immediately outside their estates for IHT purposes. These are chargeable lifetime transfers (CLTs). If these amounts plus any previous CLTs in the last seven years exceed the nil-rate band at the time, then the excess will be subject to an immediate 20% IHT tax charge. In this example: £13,225 x 20% = £2,645 for Mr Povey £11,759 x 20% = £2,352 for Mrs Povey Mr and Mrs Povey request that they receive 5% of the investment each year, which equates to £5,000, paid monthly. Any growth within the bond will be free from IHT except for any periodic or exit charges that may apply. Mr and Mrs Povey jointly invest £100,000 in a Collective Investment Bond . The bond is transferred to a discounted gift trust – discretionary version. How the trust works in practice