Before you begin
You will need to know what the original Purchase Amount was for a DGT that is already owned (not a future purchase).
You will also need to know what the Discount Amount is, because this is determined by factors outside of the purview of the software. The discount is the amount that is effectively being carved out of the trust to provide the income.
For a future purchase - Enter in the Purchase Value field the amount that is to be invested.
For an existing DGT, enter the original lump sum investment (e.g. £100,000).
The investment is then split as follows.
1. A “discounted” element is entered in the Discount Amt field. This discount leaves the Estate on day one, on the basis that it provides a lifetime income based on the individual's assumed life expectancy at the date the gift is made. For example, the individual selects an income of £5000 per year and is deemed likely to live for 12 years so that the discounted element is £60,000. Again these, are figures you will need from the provider.
2. The remaining £40,000, which you don't enter, is deemed to be the amount gifted to the beneficiaries of the Trust and is treated as a PET so that it leaves the Estate after 7 years.
3. In the Income Amt field is used to specify the amount that is to be drawn annually from the Discount Amount, as income.
When you view the DGT on the Let's See chart details, Investments tab, you will see a “Gift Amount”. This gift is the value of the trust minus the original discount amount and is meant to show the increasing value of the funds gifted rather than the actual “gift amount” for IHT purposes.
The amount gifted for IHT purposes will display as a PET or a CLT on the Legacy Overview screen, depending on whether the trust has a Bare or Discretionary structure.
The original amount placed into the DGT, which is entered as Purchase Value on the Investments screen, must be included for the system to calculate the IHT gift amount (purchase amount minus discount).
In many ways the DGT works like a bond in that you can either purchase one or already own one. You cannot contribute additional funds into a DGT once purchased. The DGT will provide annual income, which is entered as the Income Amt and will show in the Let's See details and on the Cash Flow chart in the pink planned withdrawals category.
If you plan to schedule the purchase of a DGT in the future (when New? is set to Yes on the Investments screen) select an event to schedule the purchase on the Time panel, Event tab, located on the right side of the screen. If no event is selected, the software will assume the purchase is to be made at the Start of the planning timeline.
Note that you should complete Advanced Settings > Insurance Beneficiary Designation screen to show 100% going to Person Outside of Plan, to ensure the money in the trust doesn't come back into the estate on mortality.
Discounted gift trusts and IHT calculations
The discount is the amount that is effectively being "carved out" of the trust to provide the income.
This amount does not fall back into the estate on death within 7 years. The balance (non-discounted) would be included in the estate in the event of death within 7 years. The non-discounted balance placed into the DGT will be treated as a chargeable lifetime transfer (CLT) or a potentially exempt transfer (PET) depending on whether the trust is discretionary or bare, respectively.
The DGT is a “discounted” Potentially Exempt or Lifetime Transfer. The discount is the proportion of the gift that is deemed to be attributed to providing a lifetime income. In a simple example, a client gifts £100,000 and requires a lifetime income of £5,000 per year. His life expectancy is deemed to be 12 years so the discount is £5000 x 12 = £60,000 (it would actually in practice be slightly less but that’s not our concern).
The key point is that the discount leaves the Estate immediately, i.e. it is not clawed back into the Estate if the donor dies within 7 years; the non-discounted element is treated as a PET or, if the cumulative gifts over 7 years have exceeded the Nil Rate Threshold, is subject to the Lifetime Tax charge (20%).
The withdrawals can continue for the donor’s lifetime until or unless the discount is exhausted – the Trust is treated as a single entity in terms of calculating tax on withdrawals (e.g. in the example, the £5000 withdrawals would be treated as representing 5% of the initial investment so would be tax deferred for 20 years) and investment return is applied across the whole fund. You would expect the discounted amount to remain about static or decline dependent upon the level of withdrawal and the modelled growth; the non-discounted amount would grow through investment return.