Discounted Gift Scheme (DGT)

This is an Inheritance Tax scheme whereby an amount is invested into the plan, part of which
immediately leaves the settlors' estate (the “discount”) with the balance being treated as a
PET.

The amount of the discount is determined by the medical condition of the settlor at the point of
investment and, providing they are in good health and the plan is underwritten at outset, there
would not normally be an issue with the Revenue in the event of an unforeseen early death.

The following table illustrates how useful these plans are.

Investment amount £325,000.

Male Discount Immediate Residual sum – PET. Further IHT Overall

Age (falls outside the Reduction in (falls outside estate after reduction savin
estate immediately) 7 years)
IHT after 7 g in
years* IHT*
60 £192,000 £76,800 £133,000 £53,200 £130,000
65 £170,000 £68,000 £155,000 £62,000 £130,000
70 £148,000 £59,200 £177,000 £70,800 £130,000
75 £126,000 £50,400 £199,000 £79,600 £130,000

Female Discount Immediate Residual sum – PET. Further IHT Overall

Age (falls outside the Reduction in (falls outside estate after reduction savin
estate immediately) 7 years)
IHT after 7 g in
years* IHT*
60 £215,000 £86,000 £110,000 £44,000 £130,000
65 £195,000 £78,000 £130,000 £52,000 £130,000
70 £174,000 £69,600 £151,000 £60,400 £130,000
75 £151,000 £60,400 £174,000 £69,600 £130,000
* assumes the withdrawals are replaced by investment returns and ignores the effect of charges for illustrative
purposes only

• in this example income of 5% is paid annually to the settlor. This is paid tax-free for
the first 20 years, thereafter it is taxable.
• the income decided upon at outset cannot be amended once the plan is established.
• absolute or flexible trusts can be used.
• once established, the terms of the plan cannot be amended.

This kind of arrangement is suitable for individuals who intend taking an income from savings
throughout the remainder of their lifetime before passing on remaining capital to
children/grandchildren.

Gift and Loan Trust

This kind of arrangement is another Inheritance Tax plan which has a slower IHT benefit than
the DGT plan shown above, as the benefit comes from the fact that the growth on the initial
investment is outside the estate for IHT purposes.

The settlor creates a trust by paying over a sum, which is invested in a single premium
investment bond. This amount is given away completely and will be a PET or a lifetime
transfer, depending on the type of trust used.

The individual then lends additional capital to the trustees. This is documented as being both
interest free and repayable on demand. This is invested in the investment bond already held
within the trust.
The individual may demand repayments of the loan (irregularly) as required.

On death, any outstanding loan remaining is repaid to the settlors estate. Any growth over
and above the original amount loaned is outside the settlor’s estate.

The settlor cannot access an amount beyond the original loan.

Again Absolute or flexible trusts can be used.

The benefit of a Gift & Loan Scheme is that all growth is deemed to fall outside of the estate
from outset but the settlor has access to the original loan as and when required.

A combination of both types of plan will provide an individual with income throughout their
lifetime (assuming the capital sum invested does not become exhausted), as well as access
to capital whilst reducing the value of the estate for IHT purposes.