DGT query

PippaO · March 31

Hello,

Planner wants to set out 3 scenarios for a client who is concerned about IHT and needs an income.
1. Keep £1m in cash in his name earning 4% interest and him drawing £8,000 pm from it
Vs
2. Settling £1m into a DGT with the trust owning an OB keeping the money in cash earning 4% pa and him drawing £8000 pm
Vs
3. Settling £1m into a DGT with the trust owning a GIA keeping the money in cash earning 4% pa and him drawing £8000 pm.

Transact's DGT calculator suggests that client might get a 70% discount if he put in £1m, so that would get the gift part under £325k to avoid 20% lifetime IHT.
£8k pm is 9.6% withdrawal rate, with excess over 5% being taxed on the settlor (UK res) under chargeable event rules with the OB.

I've not seen DGT's set up with a GIA before, the usual wrapper tends to be a bond. Are there any reasons or downsides with this, apart from greater reporting requirements for trustees with a GIA? The GIA wouldn't come with the same limitations on withdrawals.

Struggling to find any guidance online, if anyone could share some thoughts?

Thanks.

les_cameron · April 1

I think there's several things at play here

it's an absolute nightmare running income in a discretionary trust, tax pools, settlor interested issues, double tax returns, capital accounts and income accounts so running a non income producing asset has myriad simplification benefits
CGT allowance only £1,500

BUT!

The sample deeds are drafted by bond providers! Not sure I've seen a platform offer one.

PippaO · April 1

Thanks Les,
I thought that might be the case. If I’d never seen a GIA/collective facilitated with a DGT before there must be a reason!

smith · April 3

I'm sure Way Fund Managers used to run a flexible reversionary trust with collectives - not that I'm saying that makes it right...

benjaminfabi · April 9

Surely that are going to run out of money before they run into IHT?

Hold the capital in their name and buy a WoL plan in trust with a £3k annual premium.

les_cameron · April 9

@benjaminfabi said:
Surely that are going to run out of money before they run into IHT?

Hold the capital in their name and buy a WoL plan in trust with a £3k annual premium.

What do you do when they can't afford the WOL premiums anymore and it lapses?

benjaminfabi · April 9

@les_cameron tell them they don't need it as they won't have an IHT problem at that point?

les_cameron · April 10

Just gift/spend more and have a term policy instead?

DGT query

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