Before you begin
Note that we can only model solely owned DGTs.
You will need to know what the original Purchase Amount was for a DGT that is already owned.
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 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. The Income Amount field is used to specify the amount that is to be drawn annually from the Discount Amount, as income.
Go to the appropriate sections on the left hand side to set the growth rate and nominate the beneficiaries of the DGT.
When you view the DGT on the Let's See Year View, Investments tab, you will see the Discount.
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).
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 yellow planned withdrawals category.
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.
So in the example below, the DGT was purchased in 2018. The immediate legacy view is examining the IHT position on death at the end of year 1 in this plan, ie death in 2022. The value of the DGT shows in the valuation summary under the Life insurance heading. As death has happened within 7 years of the gift, the non-discounted amount is shown as a Non exempt PETs/CLTs. In the example shown, it is assumed that David had not used his Annual Exempt Gift allowance in the year in which the DGT was purchased, so the value is reduced to £37,000.
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)