Discounted Gift Trust UK (2026): How It Reduces Inheritance Tax While Keeping an Income

A discounted gift trust (DGT) is an insurance-based arrangement used for inheritance tax (IHT) planning. You transfer a lump sum into a trust and in exchange retain the right to receive fixed regular payments (withdrawals) for the rest of your life. The trust is usually a discretionary or bare trust holding an investment bond. Because you give up the right to the capital (retaining only the income payments), the gift is immediately 'discounted' for IHT purposes — meaning only the portion you have genuinely given away is treated as a gift. The balance of the gift falls outside your estate for IHT purposes after 7 years, following the usual potentially exempt transfer (PET) or chargeable lifetime transfer (CLT) rules.

The discount is an actuarial calculation that estimates the present value of the income stream you have retained. An underwriter (usually the insurance company providing the bond) calculates how much a third party would pay to receive those future payments, based on your age, health, and the payment amount. This value is then subtracted from the total sum invested to give the discounted (gifted) amount. For example, if you invest £200,000 and the retained income stream is valued at £50,000, the gift for IHT purposes is only £150,000. The discount is immediate — it reduces your taxable estate from the day the trust is set up, regardless of the 7-year survival rule.

It depends on the type of trust used. If the DGT is set up as a bare trust (absolute trust) — where specific named beneficiaries have fixed entitlements — the gift into the trust is a potentially exempt transfer (PET). It becomes fully exempt from IHT if you survive 7 years. If the DGT uses a discretionary trust — where the trustees choose who benefits and when — the gift is a chargeable lifetime transfer (CLT). CLTs are charged to IHT at 20% at the time of the gift (to the extent the discounted value exceeds the nil rate band) and may be subject to 10-year periodic charges and exit charges. Most financial advisers use the bare trust structure to avoid the entry charge, but discretionary DGTs offer more flexibility in distribution.

The income payments are typically structured as 5% withdrawals per year from an investment bond — the maximum HMRC allows before triggering an income tax charge (under the 'chargeable event' rules for bonds). In practice, they are not income in the legal sense; they are capital withdrawals from the bond. You set the payment level when the trust is established and it cannot normally be changed later. This rigidity is one of the main drawbacks of a DGT: if your income needs change (e.g. care home costs increase sharply), you cannot increase the withdrawals without surrendering the bond and potentially creating a taxable gain. The payments continue for the rest of your life regardless of investment performance.

DGTs are most suitable for individuals or couples who: have a large estate likely to attract IHT; need a regular income from capital but do not need access to the capital itself; are in reasonable health (the discount calculation requires medical underwriting — poor health means a smaller discount, as the income stream is shorter); are unlikely to need the capital for care fees or emergencies (because the capital is irrevocably given away); and have used their annual gift exemptions and normal expenditure exemptions but want to do more. They are not suitable for those who may need capital access in future, who are in very poor health (the discount may be negligible), or who have not taken financial advice on the investment bond component.

If you die within 7 years, the discounted element — the amount treated as immediately outside your estate — remains outside your estate regardless, because the discount is irrevocable. However, the remaining fund value inside the trust (the undiscounted element) is treated as a failed PET or a CLT-in-transition, depending on the trust structure. For a bare trust DGT: the undiscounted portion is a failed PET and may attract IHT, subject to taper relief if you survived 3–7 years. For a discretionary trust DGT: the trust fund is subject to the usual CLT rules — but the periodic charge and exit charge regime applies in any event. Your executors must report the DGT to HMRC on IHT403 if you die within 7 years.

No. Once established, a DGT is irrevocable — you cannot take the capital back. This is intentional: for the gift to be effective for IHT purposes, you must genuinely give up the capital. If you try to access the capital or change the terms in a way that benefits you, HMRC may treat it as a gift with reservation of benefit (GWR), pulling the asset back into your estate entirely. The only way to 'exit' is for the trustees to surrender the bond (which may trigger an income tax charge on any gain) and distribute the proceeds to the trust beneficiaries.

Compared to a simple gift: a DGT lets you retain an income while a direct gift gives away everything immediately. Both require 7-year survival for the PET element to become fully exempt. Compared to a loan trust: a loan trust lets you reclaim the capital (as a debt) but offers no immediate IHT discount — only the trust's growth falls outside the estate. A DGT offers an immediate discount but you cannot reclaim capital. Compared to a gift and leaseback (property): DGTs typically use investment bonds rather than property. Compared to equity release: equity release leaves the capital in your estate (the loan is deducted), whereas a DGT removes the capital from your estate immediately. DGTs are not suitable for everyone and financial advice from a regulated adviser is essential before setting one up.