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Discounted Gift Trust Case Study

Background

Mr Michael and Susan Tye are UK resident and both UK domicile. He is 66, she is 68. They have two adult children and an 11-year-old grandchild. Their private and state pensions provide a comfortable income of £80,000 a year. This is also topped up with income from their investment portfolio, but it is taxed at the higher rate.

They are reviewing their wills and have asked their financial adviser to assess the potential IHT liability and whether there are any options to reduce it through planning before they go to their solicitor to draw up the wills.

The following is a summary of their assets:

UK Investment Property £300,000
UK Home £800,000
ISA's £250,000
Investment Portfolio £1,250,000
Cash Deposits £200,000
Total : £2,800,000

The adviser consults QB Partners to review the client's circumstances, assess the IHT liability and identify a means to reduce the liability so that the adviser can present a solution to them.

After reviewing the information provided by the adviser via a QB Partners estate planning questionnaire, the initial assessment identifies that, apart from the ISA's, all assets are jointly owned so, on first death the survivor inherits the assets. Other than small bequests the remainder is to be left to the survivor. As gifts between spouses are exempt IHT will only arise on second death.

Based on the asset value above IHT on second death will be calculated as follows:

Total estate: £2,800,000

Less
Nil Rate Band: £325,000
Transferrable nil rate band: £325,000

Taxable estate: £2,150,000
Tax at 40%: £860,000

As the estate is over £2m there has been a tapered reduction in the residence nil rate bands so that the benefit of these has been lost.

QB Partners suggest that one way to significantly reduce the potential IHT liability would be for both Mr and Mrs Tye to set up Discounted Gift Trusts incorporating Offshore Bonds using some of the Investment Portfolio. Not only would this have an immediate impact on the value of the estate but it would enable the investments to roll up gross and for a retained income of 5% a year to be drawn without any immediately liability to income tax.

A DGT of £350,000 by Mr Tye would reduce the value of the estate by circa £221,000 saving over £88,000 in IHT

A DGT of £350,000 by Mrs Tye would reduce the value of the estate by circa £210,000 saving £84,000 in IHT

A total saving of over £172,000.

Their joint income could be £35,000 a year without adding to their tax bill and actually saving tax that would otherwise have been paid on the investment portfolio.

The adviser asked that if the clients liked the concept could we help with implementation?

QB Partners explained that this was part of the service covered by our Qteps Suitability Report which comes at a price of £750. Not only does this fully explain how the DGT works as a solution but makes recommendations regarding trust and product providers supported by due diligence on those providers for an additional £250. It will also include other practical steps and options to help reduce IHT in a comprehensive report.

There will be full support to help the adviser and the client with implementation of the agreed solutions.

Please see the attached PDF version of this document.

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