Use the links below, to navigate through the page.
A Discounted Gift Trust allows a sum of money to be gifted to a chosen beneficiary or beneficiaries.
Your client can take annual withdrawals from the HSBC Life Onshore Investment Bond, typically up to 5% of the total amount invested.
The Discounted Gift Trust can help with your client’s Inheritance Tax planning and mitigation. It allows them to make a monetary gift during their lifetime for Inheritance Tax purposes; part of that gift could be treated as a discount and falls outside their estate immediately for Inheritance Tax. The other part of the gift is treated as a transfer of value for Inheritance Tax, and the Inheritance Tax treatment will depend on the type of trust used.
If a client has a lump sum to invest but is unable or unwilling to give up complete access to their capital, a Discounted Gift Trust, in conjunction with the HSBC Life Onshore Investment Bond, will (subject to certain conditions) enable them to achieve an immediate reduction in their estate for Inheritance Tax purposes. In addition, retaining access to a regular stream of capital payments can improve cashflow during their lifetime.
Generally, an investor for whom this trust arrangement would be appropriate will:
To obtain a discount on the value of the amount transferred into trust, your client needs to be in reasonably good health. However, having said that, less than perfect health should not be a bar to creating a trust of this kind, provided the implications for Inheritance Tax and estate planning are understood and accepted.
By putting the HSBC Life Onshore Investment Bond into a Discounted Gift Trust, your client can:
Apart from the fixed regular payments, your client will have no access to their investment once they have created the trust. Find out more if this is the right option for your client by referring to the HSBC Life Trust Decision Tree.
A Discounted Gift Trust can be set up as an absolute or discretionary trust. Considerations include:
HSBC Life calculates the discount when the trust is established. So, for example, if your client dies within seven years of the establishment date, HMRC will typically accept the discount, if available, without further enquiry.
The settlor’s retained rights are the right to a series of regular fixed payments and is also referred to as the discount. This discount is deducted from the amount transferred into trust.
The fixed regular payments continue during the settlor’s lifetime or until the bond is exhausted, whichever occurs first. The value of the settlor’s retained rights are zero on death.
We calculate the discount according to various factors, including age, state of health, the level and frequency of payments you choose to take and the rate of growth which meets HMRC guidelines.
The remainder of the amount invested is the value of the gift for Inheritance Tax purposes. Depending on the type of trust used, this gift will be either a potentially exempt transfer if an absolute trust, or a chargeable transfer if a discretionary trust.
An absolute trust can be used if your client knows exactly who should benefit from the trust fund after their death. When creating the trust, they must specify the beneficiary(ies) and, if more than one, the share of the trust fund to which they are each entitled. They cannot change their mind at a later date.
An advantage of inheritance tax is that the absolute discounted gift will be treated as a potentially exempt transfer for Inheritance Tax purposes. This means that there will be no immediate Inheritance Tax charge and, provided that your client survives for at least seven years after making the gift, the whole of their trust fund will be free from Inheritance Tax on their death.
A discretionary trust may be chosen if your client wants to retain some flexibility over who will benefit. No beneficiary will have a fixed right to anything; instead, it will be up to the trustees to decide who will benefit, in what proportion and when the trust fund will be distributed after the settlor’s death. The trust deed sets out the classes of beneficiaries who can benefit, and your client can add named individuals to the trust deed.
As a result of the flexibility provided by a discretionary Discounted Gift Trust, the discounted gift will be classed as a chargeable transfer with the following Inheritance Tax implications:
1. Complete the statement of health form
2. The discount will be assessed and confirmed
3. Once the discount has been provided, please complete the trust and bond application forms
The value of the gift they are making will fall outside their estate, provided they survive for seven years from creating the trust.
Your client can choose between monthly, bi-monthly (every other month), quarterly, termly (every four months), half-yearly or yearly options for their regular payments.
Once selected, regular payments are fixed and will continue throughout your client’s lifetime unless, of course, the value of the Bond falls to nil, when payments will cease.
Clients can choose any level of payment up to 10% per year of the amount they invest. However, remember that the value of the Bond will reduce if the amount withdrawn exceeds the rate at which the Bond grows.
A Discounted Gift Trust is a long-term arrangement, so it is essential that the widest investment choice is available. With the HSBC Life Onshore Investment Bond, your client and the trustees can access the expertise of investment managers across a range of fund management groups.
The initial investment will be allocated to the Bond and held in a cash account which forms part of the investment portfolio and is used to debit the cost of fund purchases and credit the proceeds from fund sales.
Once the trust fund is allocated to the Bond, your client and their co-trustees can then build a portfolio from a choice of collective investments such as open-ended investment companies (OEICs) and unit trusts. Other than the minimum trustee investment levels which apply to each asset held in the portfolio, there are no restrictions on how the investment can be spread.
The cash account can also be used to hold monies awaiting investment or as a cash shelter in times of market volatility.
The person who created the trust, the settlor, will automatically be a trustee, but they will need to appoint at least one other trustee to act with them.
If both your client and their spouse (or civil partner) are creating a joint arrangement, there is no actual requirement to appoint an additional trustee at the outset.
Your client may prefer to appoint a professional trustee, such as their solicitor but should bear in mind professional trustees are permitted to charge for their services.
You can appoint anyone to be a trustee, provided they are over the age of 18 years and have full mental capacity.
Appointing an additional trustee at the outset is generally considered prudent.
However, it will be necessary for your client to appoint an additional trustee at some point to ensure that at least two trustees remain in the event of their death or the death of their spouse (or civil partner).
Under an absolute trust, your client will name those they wish to benefit and the shares they should take. Once they have made this choice, they cannot change their mind. In the event of your client’s death, the trustees will be able to pay the appropriate share of the trust fund to any adult beneficiaries. The trustees will usually have to retain the trust fund where there are minor beneficiaries until each beneficiary reaches age 18 (16 in Scotland).
Under a discretionary trust, the beneficiaries are described as a class of individuals such as your client’s children, grandchildren, nieces, nephews, spouse or surviving spouse (unless they created the trust as joint settlors or deliberately excluded their spouse) and the spouse or surviving spouse of any of the beneficiaries.
If someone associated with the trust dies, the trustees should notify us as soon as possible. We need to know if:
The steps required depend on the role of the person who died.
If a single (or surviving) settlor of an absolute trust or discretionary trust dies, the trustees must advise us to stop making the regular withdrawals. The trustees will then be able to distribute the trust fund to the beneficiary(ies).
If a trustee dies, the remaining trustees must advise us of this and provide evidence in the form of a copy of the Death Certificate.
If one of the lives insured dies but is survived by other lives insured, there will be no effect on the arrangement, and the Bond will continue.
If a beneficiary of an absolute trust dies, the value of the trust fund, less the value of the Settlor’s Retained Right, will be included in the beneficiary’s estate for Inheritance Tax purposes.
Yes, any Discounted Gift Trust needs to comply and use the Trust Registration Service. In addition, affected trusts must appoint a lead trustee or agent to register as HMRC’s primary contact. See the Trust Registration Service page for more details.
Your client can arrange to receive regular payments of up to 5% of the original investment every year without any immediate income tax charge. In addition, any unused part of this allowance can be carried forward, so they can potentially defer any higher or additional rate income tax liability until 100% of the original investment has been withdrawn, or the Bond ends.
Any amount over the available 5% allowance is usually added to their income and may be subject to income tax. If this increases your client’s income above £100,000, their personal allowance may be reduced.
The taxation of discretionary trusts
The rate for taxation of trusts will depend upon whom the liability falls.
– The settlor will be charged at their highest marginal rate
– If the settlor cannot be taxed (because they are either deceased or a non-UK resident), then the UK resident trustees will be taxed at 45%, but will also receive a credit for basic rate tax of 20%
– Where a beneficiary is liable, the tax paid will depend on their personal income tax position