Eleanor and Felix learn that a gift into a DGT is a transfer of value where the value is determined by the ‘loss to the estate’. That will comprise the amount invested less the value of the right to the repayments (see below). The open market value of these repayments depends on age, health and size of the repayments. The adviser explains that HMRC’s preference is that full underwriting should be carried out prior to the DGT being effected. The actual amount of the discount may need to be ultimately agreed with HMRC, but the Insurance Company offers an indication of the value at inception based on medical evidence provided.
Both Eleanor and Felix apply for a UK Insurance Bond on a single owner, single life basis. Each then completes a DGT deed. In their deed, each selects the size of the payments and the frequency (e.g. monthly, quarterly etc.). In both cases, the withdrawals selected are within 5% limits, even accounting for ongoing adviser charging. Assuming no shortfall, both have the right to these regular payments for life, and on death that right ceases and so does not swell the value of the deceased’s estate. The trustees then have the discretion to distribute the remaining capital to any of the class of beneficiaries. This includes children and remoter descendants but excludes the settlor. The surviving spouse is however a potential beneficiary. What this means is that when one of them dies, the survivor will still enjoy the regular payments from their own DGT but in addition, the trustees of the first deceased’s DGT have discretion to advance any remaining funds to the survivor should that need arise.
The adviser explains that it would have been possible, instead, to have set up a joint DGT and in that event the total joint repayments would have continued after first death, and simply ceased after second death. That would be less flexible, but would probably have created a bigger discount. The adviser however clarifies that the main objective of the DGT is to mitigate IHT and carve out access to pre-determined capital payments for expenditure needs. Although the discount provides an immediate reduction in the estate, it is only relevant for death within seven years – both however are in good health.
They learn that it is not sensible to maximise the pre-determined capital payments just to increase the size of the discount. If a settlor carves out access to more capital than actually needed for expenditure then it could be counterintuitive to the overall IHT mitigation strategy, as the excess would build up inside the estate.
When each spouse dies, the bond in their DGT will pay out if the deceased was the sole life assured. The chargeable gain will be taxed on the deceased in the year of death. Given their low level of income it is not anticipated there will be any tax to pay, and the proceeds can then be distributed as the trustees see fit.