Stopping withdrawals from your Discounted Gift Trust

A Discounted Gift Trust (DGT) is a way to reduce the value of your estate for inheritance tax (IHT) purposes, whilst still allowing you to receive regular withdrawals during your lifetime.

But what if your circumstances change and you no longer need these withdrawals? Here is what you need to know.

How do DGTs work?

• You place a lump sum into a Trust, usually by investing in a bond.
• You keep the right to receive regular withdrawals (often up to 5% per year).
• The DGT Provider will calculate how much of the lump sum will be needed to provide withdrawals, which involves an estimation of your life expectancy.
• The sum calculated for the withdrawals is known as the discount.
• The value of your gift for IHT is reduced immediately by the discount because you’re keeping some rights to the money (the withdrawals).
• The remaining lump sum may remain in your estate for IHT for a minimum of seven years depending on the type of Trust structure.

Further information can be found in our article on Discounted Gift Trusts.

What if you want to stop withdrawals?

Sometimes, people find they no longer need the extra income from their DGT or on occasion, withdrawals of 5% have continued for 20 years and any further withdrawals may have immediate tax implications.

If you are considering stopping the withdrawals, the first step is to check with your Provider that withdrawals can be paused or stopped as it may not be a possibility for your particular DGT. It is also important you are aware of the tax implications, as explained later.

If your Trust deed allows and you want to stop your withdrawals, there are some options.

• Pause withdrawalsYou can choose to suspend your withdrawals for a fixed period (such as six months). The amount you would have received during this time will be treated as a gift of that value. When withdrawals are paused without a set period in mind and with the possibility of being resumed in the future, accurately valuing this option can be challenging. In most cases, it is regarded in the same way as when withdrawals are permanently discontinued.
• Stop all future withdrawals: If you decide you never want withdrawals again, the value of your gift is based on what those future withdrawals would be worth at the time you give them up. This calculation takes into account your age and health at that moment. It is a similar calculation to working out the original discount, but with updated details.

What are the tax implications?

Giving up your right to withdrawals is treated as making a new gift for IHT purposes. This is a complex area of planning because it means that there is a period of between seven to 14 years, during which the gift could be taxed if you die. The actual period will depend on the Trust structure and any previous gifts that have been made.

The original discount you received when setting up the Trust is not affected.

If you are just pausing withdrawals for a short, specified time, only the value of those missed payments counts as a new gift.

Should you stop withdrawals?

Before deciding, consider if there are other ways to use the withdrawals that might be more beneficial. For example, you could use them for gifts that qualify for other tax exemptions or for charitable donations.

However, it is important to note that the withdrawals from a DGT are considered capital, not income, so some tax exemptions do not apply.

In cases where the 5% allowance has been completely used up, there are also tax implications for continuing with withdrawals, so it is important to get professional advice.

In conclusion

If you no longer need withdrawals from your DGT, you may be able to stop them, but this may have IHT consequences. It is important to get advice before making changes, to ensure you understand the impact on your estate and your tax position.

If you would like more information about DGTs, then please speak with your financial adviser or contact one of our Financial Planning Consultants who will be happy to discuss this further with you.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.