Discounted Gift Trust - Any Thoughts ?

[bad company]

My IFA has suggested one these known as a DGA to reduce my income tax and CGT. It s a bit scary effectively giving away so much money though I can still draw 5% as income. I d go for the Discretionary Trust.

Anyone here have any experience or thoughts on this?

Edited by bad company on Saturday 1st August 11:46

[C69]

Discounted gift trusts are usually used as a tool to reduce potential inheritance tax liabilities, rather than to reduce income tax and capital gains tax. Did your IFA explain that to you (particularly the 'discounted' part and chargeable lifetime transfers for discretionary trusts)?

One key thing to consider is the level of regular capital payments that you'd be receiving, because once the DGT is set up it can't be changed. Too high can be just as bad as too low. That's because if you don't need those capital payments for spending / investing elsewhere, then over time you'll just be returning capital to your estate (thus defeating the objective of reducing IHT liabilities).

[Panamax]

bad company said:

Anyone here have any experience or thoughts on this?

My thoughts are to keep things simple. What's the point getting back some of the stuff you're trying to give away? With any of these arrangements somebody, somewhere is taking their slice of pie and reducing the size of yours.

And never forget that for any ongoing arrangement the government can always change the rules in future.

My personal view of IHT planning is just decide how much you're willing to give away and give it away.

For any IHT planning there must be something to be said for getting it done before the first Burnham Budget. Insofar as IHT is essentially a voluntary tax, thanks to the seven year rule, he may well be tempted to roll out a broader tax on lifetime gifts. Some gifts into trust already attract an immediate 20% IHT charge.

[c32dave]

I looked at these, and the structure that made more sense for me was a flexible reversionary trust. Basically this has the ability to waive repayments in any year and leave them in the trust, either to withdraw later, or to pass onto other beneficiaries.

However the fees, as with many of these advisor-packaged structures, put me off. Compounding means that over 20 years, a 2% fee load is worse than paying 40% IHT. (1.05^20 vs 1.07^20 for those who question how 2% is worse than 40%).

[Rafka]

Panamax said:

bad company said:

Anyone here have any experience or thoughts on this?

My thoughts are to keep things simple. What's the point getting back some of the stuff you're trying to give away? With any of these arrangements somebody, somewhere is taking their slice of pie and reducing the size of yours.

And never forget that for any ongoing arrangement the government can always change the rules in future.

My personal view of IHT planning is just decide how much you're willing to give away and give it away.

For any IHT planning there must be something to be said for getting it done before the first Burnham Budget. Insofar as IHT is essentially a voluntary tax, thanks to the seven year rule, he may well be tempted to roll out a broader tax on lifetime gifts. Some gifts into trust already attract an immediate 20% IHT charge.

I can see the logic of what you’re saying. I’m assuming that the op wants to be able to continue taking income from the arrangement though.

[YouWhatAgain]

C69 said:

Discounted gift trusts are usually used as a tool to reduce potential inheritance tax liabilities, rather than to reduce income tax and capital gains tax. Did your IFA explain that to you (particularly the 'discounted' part and chargeable lifetime transfers for discretionary trusts)?

One key thing to consider is the level of regular capital payments that you'd be receiving, because once the DGT is set up it can't be changed. Too high can be just as bad as too low. That's because if you don't need those capital payments for spending / investing elsewhere, then over time you'll just be returning capital to your estate (thus defeating the objective of reducing IHT liabilities).

The capital payments may be adding to your estate, but the investments are hopefully outgrowing the original investment and then at least that amount will be outside your estate.

[Panamax]

"Hope" isn't a strategy, especially when advisers are helping themselves to their slice of your pie, come rain or shine.

That's the fundamental mechanism of financial services, the client may win or lose but the adviser's percentage guarantees them a win, either way.

[Rafka]

Panamax said:

"Hope" isn't a strategy, especially when advisers are helping themselves to their slice of your pie, come rain or shine.

That's the fundamental mechanism of financial services, the client may win or lose but the adviser's percentage guarantees them a win, either way.

Have you had a bad experience with a Financial Advisor?

I can see your point about their fees but if the alternative is paying 40% IHT it may be worthwhile for some.

[Phil.]

Rafka said:

Have you had a bad experience with a Financial Advisor?

I can see your point about their fees but if the alternative is paying 40% IHT it may be worthwhile for some.

As explained above, in certain cases/situations the advisor fees can mount up to more than the IHT loss.

I detest % advisor fees over a long period unless value add can be demonstrated that exceeds the fees which is not the case for many IFA’s.

[grumbas]

We set one up a couple of years back, of the options available it made the most sense for the circumstances.

If you're in a position where you need to generate an additional monthly income (that must be spent) and address IHT challenges at the same time it's worth looking into.

My advice would be find a good independent IFA as the advice will probably be better and the fees lower!

[Rafka]

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

[YouWhatAgain]

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

[Rafka]

YouWhatAgain said:

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

You mean the fund management charges which I’d assume to be the same as normal, like funds held within say a pension or ISA.

[YouWhatAgain]

Rafka said:

YouWhatAgain said:

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

You mean the fund management charges which I d assume to be the same as normal, like funds held within say a pension or ISA.

Yes did your IFA still charge his management fee for the investments in the trust?

[Rafka]

YouWhatAgain said:

Rafka said:

YouWhatAgain said:

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

You mean the fund management charges which I d assume to be the same as normal, like funds held within say a pension or ISA.

Yes did your IFA still charge his management fee for the investments in the trust?

Apparently not because that would have to come out of my income from the trust. Sounds odd though, 1% doesn’t seem a lot in the scheme of things.

[Nicetobenice]

My take on it that these sort of things are OK if you have a lot of assets and cash but less so if you don't have great flexibility elsewhere.

My experience is limited on a personal level to my father creating a trust structure (mainly for my brothers) and it all being massively complicated when he died early and his earning potential going with him.

My mother lived for 12 years after and that was never part of his plan - at the time this wasn't unreasonable as she had been ill for years before his death but had obviously done a deal with the devil as she kept trucking for years after being given 2 years to live at tops and weeks if she kept drinking.

[YouWhatAgain]

Rafka said:

YouWhatAgain said:

Rafka said:

YouWhatAgain said:

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

You mean the fund management charges which I d assume to be the same as normal, like funds held within say a pension or ISA.

Yes did your IFA still charge his management fee for the investments in the trust?

Apparently not because that would have to come out of my income from the trust. Sounds odd though, 1% doesn t seem a lot in the scheme of things.

I would check that because the quotes I got did include a 1% management fee that had to be paid outside of the trust. Although the setup fee you mentioned was a fixed fee.

[C69]

YouWhatAgain said:

Rafka said:

YouWhatAgain said:

Rafka said:

YouWhatAgain said:

Rafka said:

I spoke with my IFA about these yesterday. It looks like a good way of reducing both income and inheritance tax. He quoted 1% setup fee with no ongoing IFA charges.

Edited by Rafka on Saturday 8th August 10:34

What about the charges on the investment vehicle that is held within the trust?

You mean the fund management charges which I d assume to be the same as normal, like funds held within say a pension or ISA.

Yes did your IFA still charge his management fee for the investments in the trust?

Apparently not because that would have to come out of my income from the trust. Sounds odd though, 1% doesn t seem a lot in the scheme of things.

I would check that because the quotes I got did include a 1% management fee that had to be paid outside of the trust. Although the setup fee you mentioned was a fixed fee.

Agreed, I would definitely double-check those fees, especially regarding the on-going management of the DGT. Or does your IFA charge a separate monthly fee for looking after your affairs?

I'm somewhat surprised that your IFA is charging a percentage-based set-up fee, if only because surely most clients would ask something obvious like "does setting up a £200k DGT involve twice as much work as setting up a £100k DGT?"

[Rafka]

C69 said:

I'm somewhat surprised that your IFA is charging a percentage-based set-up fee, if only because surely most clients would ask something obvious like "does setting up a £200k DGT involve twice as much work as setting up a £100k DGT?"

Restaurants have been doing similar for years. Is it more work to open a £100 bottle of wine than a £20 bottle?

[LeoSayer]

The price will be based on more than just the work done. They also need to consider the risk of future legal action and compensation which will rise in line with the sum in question.