A Discounted Gift Trust (DGT) is a specialist estate planning arrangement most often used as part of a longer-term inheritance tax planning strategy. Nevertheless, its appeal goes beyond simply avoiding taxation.
People typically look for Discounted Gift Trusts when they want certainty over income, how much they can afford to give away, and whether decisions made today will still make sense many years from now.
TL;DR: Discounted Gift Trusts explained
A Discounted Gift Trust is a long-term planning tool for people who want to give away capital but still rely on a predictable income. In summary, you place money into trust, keep a fixed income for life, and give up access to the capital. Part of the gift may be treated as outside your estate immediately, depending on individual circumstances.
These trusts suit people who especially value certainty over flexibility and can afford to lock capital away permanently. They are not designed for changing income needs or short-term planning. The income cannot usually be increased, and the trust cannot easily be undone.
Altogether, when used correctly, a Discounted Gift Trust can sit alongside wider estate and inheritance tax planning. While, when used incorrectly, it can create rigidity. Advice and careful affordability checks are essential before proceeding.
What you will learn in this guide
This guide explains what a DGT is, how they work in practice, and who they may be suitable for. It also addresses common questions raised by HMRC guidance, calculators, fees and UK providers. Lastly, we cover the benefits, disadvantages, and what happens over time, including upon death.
Here’s an overview of the main sections:
- What a Discounted Gift Trust is and how DGTs work
- The pros, cons and suitability of these trusts
- How a Discounted Gift Trust helps reduce inheritance tax
- The key considerations around DGTs vs other types of trusts
- Important facts, laws and myths about Discounted Gift Trusts
- What happens to the capital when you pass away
- When and for who they are a good idea
- Realistic examples of how DGTs work in different situations
- The main words and phrases associated with this type of trust
What is a Discounted Gift Trust?
A Discounted Gift Trust is a type of arrangement where you place a lump sum into a trust and retain the right to a fixed level of income for the rest of your life. The capital placed into the trust is treated as a gift, but because you retain an income, the gift is valued at less than the amount transferred.
That reduction in value is known as the “discount”. It reflects the actuarial value of the income you keep and is assessed at the time the trust is set up.
In simple terms, a DGT allows you to give money away while still paying yourself a regular income.
- A lump sum is placed into trust
- You keep a fixed income for life
- The gift is reduced by an actuarial discount
- The trust is usually irrevocable
- The structure is designed for long-term planning
The trust is normally established using an investment bond, which provides the mechanism for paying the income.
How are DGTs different from other trusts?
All in all, Discounted Gift Trusts differ from many other trust types because the retained income is built into the structure from the outset. You do not need to request payments or rely on trustee discretion for income.
This contrasts with Flexible Reversionary Trusts, where access is optional rather than guaranteed.
- Income is fixed at the outset
- Payments continue for life
- The level of income cannot usually be changed
- The discount is calculated once
- The structure is designed for certainty
This design makes DGTs particularly attractive to people who prioritise predictable income.
How does a Discounted Gift Trust work?
Understanding how a Discounted Gift Trust works is essential before considering whether it fits your circumstances. While the concept is straightforward, the mechanics matter.
The trust is established in stages, each with long-term implications.
1: The initial gift into trust
The process begins when a lump sum is transferred into the trust. This is usually funded using a single premium investment bond, which sits within the trust.
At this point, the gift is made for inheritance tax purposes, subject to the discount applied.
- Capital is transferred into trust
- The trust is normally irrevocable
- An investment bond becomes the trust asset
- Ownership moves away from you
- The gift starts the seven-year clock
Once established, the trust cannot usually be undone.
2: The retained right to income
When the trust is set up, you select a fixed level of income. This is expressed as a monetary amount or a percentage of the original investment.
That income is paid for life and does not depend on investment performance.
- Income is fixed at the outset
- Payments are made regularly
- Income continues for life
- Payments are not discretionary
- The amount cannot normally be increased
This retained income is the reason a discount applies.
3: What the “discount” actually means
The discount represents the actuarial value of the income you are expected to receive over your lifetime. Because you are keeping that benefit, HMRC does not treat the full transfer as a gift.
The discounted portion is excluded from your estate immediately for inheritance tax purposes.
- The discount reflects retained benefit
- It is calculated using actuarial tables
- Age and health influence the outcome
- The discount is assessed once
- It is not guaranteed (subject to underwriting
The remaining value is treated as a potentially exempt transfer.
Some examples of how DGTs work
If you’re new to this topic, here are a couple of examples of Discounted Gift Trusts. These examples of DGTs help you understand more about how they work.
Example: Fixed income with partial discount
Tilda, aged 55, invested £250,000 into a Discounted Gift Trust and retained £10,000 a year for life. Based on underwriting, £80,000 was discounted and excluded immediately, with the balance treated under the seven-year rule.
Example: No discount due to underwriting outcome
Colin established a Discounted Gift Trust, but underwriting did not support an immediate discount. While no immediate inheritance tax reduction applied, the trust still provided income certainty and long-term estate planning benefits.
Why are they commonly used?
Discounted Gift Trusts are not short-term solutions. They are used by people who are thinking ahead and want structure rather than flexibility.
They appeal most to those who value predictability.
Creating a predictable income for life
One of the main reasons people choose a DGT is income certainty. Once set, the income continues regardless of market conditions.
This can provide reassurance during retirement planning.
- Income is known in advance
- Payments continue even in downturns
- No reliance on trustee decisions
- Budgeting becomes easier
- Retirement income is stabilised
This certainty often outweighs flexibility for many individuals.
Giving away capital while retaining certainty
A DGT allows capital to be given away without sacrificing income. This can help people feel more comfortable making a lifetime gift.
The psychological barrier of “losing access” is reduced.
- Capital leaves your estate
- Income remains secure
- Future planning becomes clearer
- Affordability can be assessed upfront
- Decisions feel more controlled
This balance is central to the appeal of using this type of trust to protect wealth and give away your assets.
Long-term planning rather than short-term solutions
DGTs are designed for people who can commit capital for the long term. They work best when there is no expectation of needing the lump sum again.
As a result, they suit long planning horizons.
- The seven-year rule and taper relief apply
- An immediate discount may apply
- Growth occurs outside your estate
- Later reversals are not possible
- Patience is essential
They reward foresight rather than urgency. These arrangements are for those who take a long-term view of wealth building and asset protection.
How the ‘discount’ for DGTs is calculated
The discount is not arbitrary. It is calculated using actuarial principles and HMRC-recognised methodology.
Understanding this avoids unrealistic expectations.
Age, health, and life expectancy
The size of the discount depends primarily on age and health. Younger individuals or those in good health may receive a smaller discount because they are expected to receive income for longer.
Conversely, shorter life expectancy can increase the discount.
- Age influences income duration
- Health affects actuarial assumptions
- Medical underwriting may apply
- No two cases are identical
- Discounts vary widely
This variability is important to understand upfront.
Why does the discount vary between individuals?
Two people investing the same amount may receive very different discounts. This is not an error. It reflects different actuarial assumptions.
This is why generic calculators can only ever be illustrative.
- Discounts are personal
- Health disclosures matter
- Age bands influence outcomes
- Income level affects calculations
- Assumptions are fixed at outset
Personalised assessment is essential.
Why is a discount not guaranteed?
Firstly, a discount is not automatic. As a result, in some cases, underwriting may not support a meaningful discount.
In such situations, the trust may still function, but without an immediate inheritance tax benefit.
- Discount depends on underwriting
- Immediate relief may be limited
- Long-term benefits may still apply
- Expectations must be managed
- Getting professional advice is critical
This is why DGTs should never be viewed as guaranteed tax solutions, in particular those with complex estate planning needs.
What happens to the remaining trust value?
A common source of confusion is what happens to the part of the trust that is not discounted.
That treatment depends on how the trust is used over time.
If income is taken as planned
If income is taken exactly as set out, the discounted portion remains outside the estate, and the remaining value follows standard inheritance tax rules.
- Income does not affect the discount
- Payments continue for life
- The remaining gift runs its course
- Growth accrues inside the trust
- Planning assumptions remain intact
Consistency is key.
If income is never taken
If income is never taken, the retained right still exists. The actuarial discount remains based on the original assumptions.
- The trust value may grow over time.
- Discount remains unchanged
- Growth stays within the trust
- Estate value may reduce further
- No recalculation takes place
- Trust continues as planned
The retained right does not disappear.
What happens to a Discounted Gift Trust on death
On death, the retained right to income ends. The trust assets then pass according to the trust terms, usually to beneficiaries.
Only the non-discounted portion may be considered for some inheritance tax if death occurs within seven years. Depending upon where in that seven-year period you pass, taper relief for IHT may be applied as part of the 7 year rule.
- Income stops on death
- Trust assets pass to beneficiaries
- The discounted amount stays excluded
- The seven-year rule may apply
- Trust avoids probate
This is a key planning consideration.
Do these trusts help you avoid inheritance tax?
DGTs appeal especially to people in good health who want to reduce inheritance tax without cutting themselves off from access completely. Once set up, though, the trust is fixed, no changes, no reversals. It’s an effective tax planning tool with specific benefits and limitations, best used when supported by proper advice.
If you’re serious about inheritance tax planning and want to understand the full potential of these trusts, read our Guide to using Discounted Gift Trusts to avoid inheritance tax. It covers how to use them to pass on wealth efficiently, lock in long-term tax savings, and avoid the common mistakes that trip people up later.
How Discounted Gift Trusts interact with inheritance tax rules
In summary, the gift into a DGT is treated partly as an immediately exempt transfer and partly as a potentially exempt transfer.
While the discount is excluded immediately, the balance follows the seven-year rule.
- Immediate exclusion may apply
- Seven-year clock still matters
- Taper relief may be relevant
- Rules depend on survival
- Outcomes vary by case
Altogether, for detailed tax outcomes, specialist advice is required.
Where immediate and long-term benefits can arise
Some benefits arise immediately through the discount. Others depend on time and survival.
For a deeper exploration, this should link to your dedicated inheritance tax article.
Discounted Gift Trusts vs other IHT planning options
All in all, Discounted Gift Trusts should always be considered alongside alternatives. Each trust type has different strengths, and suitability depends on personal priorities rather than tax outcomes alone.
DGTs vs Flexible Reversionary Trusts
The main distinction between Discounted Gift Trusts and Flexible Reversionary Trusts lies especially in income certainty versus flexibility. DGTs prioritise guaranteed income, while FRTs prioritise optional access.
- DGTs provide fixed income for life
- FRTs allow optional access at set times
- DGTs suit those who want certainty
- FRTs suit those who value flexibility
- Each carries different planning risks
Choosing between them depends on income needs and tolerance for uncertainty.
DGTs vs outright gifting
Outright gifting involves giving assets away completely, with no retained income. While simpler, this approach requires confidence that income and capital will not be needed later.
Discounted Gift Trusts sit between outright gifting and full retention.
- Outright gifts remove capital entirely
- DGTs retain an income stream
- Outright gifting is simpler administratively
- Both involve irreversible transfers
- Tax outcomes differ significantly
The right choice depends especially on priorities around income, control, and simplicity.
The pros and cons of Discounted Gift Trusts
As you know by now, Discounted Gift Trust can be a powerful long-term wealth and estate planning tool, but it is not universally suitable.
Additionally, like most trust-based arrangements, it involves trade-offs between certainty, flexibility, and control. Understanding both the advantages and the disadvantages of DGTs is essential before deciding whether this type of trust fits your wider estate planning objectives.
The benefits and advantages
One of the main attractions of a Discounted Gift Trust is the balance it strikes between giving capital away and retaining a reliable income. For the right individual, this can provide reassurance while still supporting long-term planning goals.
The key advantages of DGTs include:
- Retaining a fixed income for life
- Part of the gift may be excluded from inheritance tax immediately
- The remaining value can fall outside the estate after seven years
- Income payments are predictable and structured
- Trust assets are managed for beneficiaries outside the estate
Because the income is set at the outset, it can be built around known spending needs, offering stability and peace of mind. For people who value certainty and are comfortable committing capital long term, this structure can sit neatly alongside other planning arrangements.
What are the disadvantages of Discounted Gift Trusts?
The same features that create certainty also introduce limitations. A Discounted Gift Trust is intentionally rigid, which means it will not suit individuals whose circumstances or income needs may change significantly over time.
Common disadvantages of DGTs can include:
- Income is fixed and cannot usually be increased
- Capital placed into trust cannot normally be reclaimed
- Inflation may erode the real value of income over time
- Affordability must remain sustainable for life
- Flexibility is limited compared to other trust options
Once the trust is established, changes are difficult and sometimes impossible. This makes careful upfront planning critical. Where future spending needs, health costs, or lifestyle changes are uncertain, alternative structures may offer greater adaptability.
A Discounted Gift Trust works best when it is chosen deliberately, for the right reasons, and as part of a wider, well-considered estate planning strategy rather than as a standalone solution.
When are Discounted Gift Trusts a good idea?
Discounted Gift Trusts are not suitable for everyone. They tend to appeal to a specific profile.
Of course, each individual’s situation is different, so we can’t recommend them. However, Discounted Gift Trusts are typically a good idea for people needing a solution that protects and lets them benefit from their wealth.
In summary, DGTs could be a solid option and a good idea for:
- People in their 50s or early 60s
- Long term investors and wealth builders
- Those looking to protect their assets
- People in good health and fitness
- Individuals with an eye on inheritance tax
Let’s take a look at some examples of when using this type of trust is a good idea.
People planning for inheritance tax in their 50s or 60s
Many people explore DGTs when planning for later life rather than reacting to urgent tax concerns. If you’re in your 50s and are looking to avoid inheritance tax, they offer an effective planning option for a number of reasons:
- Long IHT planning horizon
- Affordability can be assessed
- Income needs are clearer
- Health assessments are realistic
- Flexibility trade-offs are understood
Timing matters. And if you haven’t got to grips with inheritance tax by the time you’re over 50 years of age, paying it proper consideration is highly recommended.
People who want income certainty
DGTs suit people who value predictable income over flexibility. This preference often becomes clearer approaching retirement. These types of trusts are solid choices for people seeking long-term stability:
- Income certainty is prioritised
- Flexibility is less important
- Budgeting is simplified
- Risk tolerance is moderate
- Control is structured
This mindset aligns well with DGTs.
Individuals who are comfortable giving away capital
The capital placed into a DGT is no longer personally owned. Comfort with this is essential.Here are some key points to:
- Capital is irreversibly gifted
- Access to lump sums is lost
- Income replaces ownership
- Trust terms govern outcomes
- Confidence in planning is needed
Without this comfort, DGTs are rarely suitable.
Discounted Gift Trusts: Disadvantages and drawbacks
Discounted Gift Trusts are designed for certainty, not flexibility. While they work well in the right circumstances, they are not universal solutions. In some situations, the structure can create limitations that outweigh the benefits, particularly where future needs are uncertain.
Understanding when a DGT may be unsuitable is just as important as knowing when it works well.
Needing flexible or increasing income
A Discounted Gift Trust provides a fixed income for life, set at the outset. This can be reassuring, but it can also feel restrictive if circumstances change. If your income needs may rise over time, the lack of flexibility can become a disadvantage.
This is particularly relevant where inflation, lifestyle changes, or unforeseen costs may increase spending requirements later in life.
- Income is fixed at the outset and cannot usually increase
- Inflation can reduce the real value of income over time
- Unexpected expenses may place pressure on finances
- Income cannot be adjusted to reflect changing needs
- More flexible trust options may be more suitable
This limitation does not make DGTs unsuitable in principle, but it does mean income planning needs to be realistic and conservative from the start.
Short-term access to capital
A Discounted Gift Trust involves making a genuine gift of capital. Once the trust is established, the lump sum is no longer personally owned and cannot normally be reclaimed.
If there is a reasonable chance that capital may be needed in the future, a DGT may not be appropriate.
This is especially important where assets are needed for contingencies rather than long-term planning.
- The gifted capital cannot usually be accessed
- The trust is generally irrevocable
- Liquidity is reduced once funds enter the trust
- Unexpected emergencies must be planned for elsewhere
- Alternative planning structures may offer greater access
Careful consideration should be given to emergency funds and overall financial resilience before committing capital.
Uncertain affordability
Affordability is central to the suitability of a Discounted Gift Trust. The retained income must be sufficient to meet living costs for life, not just current expenses. If affordability is marginal, the structure can introduce long-term risk.
Future costs, particularly in later life, need to be factored in from the outset.
- Income must cover ongoing living expenses
- Future cost increases should be anticipated
- Care fees may become relevant later
- Other income sources must be reliable
- Stress testing affordability is essential
Where income security is uncertain, more flexible arrangements may be preferable.
Common misunderstandings about Discounted Gift Trusts
Discounted Gift Trusts are often misunderstood, particularly by those encountering them for the first time. Clearing up common misconceptions helps ensure expectations are realistic and aligned with how the trust actually works.
“I still own the money”
Once funds are placed into a Discounted Gift Trust, the capital no longer belongs to you. What you retain is the contractual right to a fixed income, not ownership of the underlying assets.
This distinction is critical and underpins the tax and legal treatment of the trust.
- Legal ownership transfers to the trust
- You retain the right to income only
- Trustees control the trust assets
- Capital is no longer personally owned
- This separation is fundamental to the structure
Understanding this early helps avoid disappointment or confusion later.
“The discount is guaranteed”
The discount applied to a Discounted Gift Trust is not guaranteed. It depends on actuarial assumptions, including age, health, and the level of income retained. In some cases, underwriting may result in a smaller discount than expected, or no immediate discount at all.
This does not mean the trust fails, but expectations must be realistic.
- Health and age influence the calculation
- Underwriting outcomes vary between individuals
- Income levels affect actuarial assumptions
- No fixed or guaranteed discount applies
- Long-term benefits may still exist
Clear explanation at the outset helps avoid over-reliance on assumed outcomes.
“I can change the income later”
The income taken from a Discounted Gift Trust is fixed when the trust is established. It cannot usually be increased, and altering it later may undermine the structure or trigger adverse tax consequences.
This makes accuracy at the setup stage essential.
- Income is locked in at the outset
- Increases are not permitted
- Reductions may breach trust terms
- Flexibility is intentionally limited
- Planning assumptions must be correct
This reinforces the importance of careful income planning before proceeding.
Practical considerations before setting one up
Before establishing a Discounted Gift Trust, practical considerations should be addressed carefully. These decisions have long-term consequences and should not be rushed.
Affordability and long-term income needs
The income from a DGT must be sustainable for life. This requires realistic assumptions about spending, inflation, and future needs. Stress testing helps ensure the structure remains appropriate over time.
- Living costs must be fully covered
- Inflation should be factored in
- Other income sources must be reliable
- Later-life care costs may arise
- Regular affordability reviews are important
Affordability is the foundation of suitability.
Irreversibility of the gift
Firstly, once established, a Discounted Gift Trust cannot usually be undone. Secondly, the decision to gift capital must be made with confidence and clarity. This finality is both a strength and a limitation.
- Capital is permanently transferred
- Trust terms apply for the long term
- Mistakes are difficult to correct
- Advice reduces structural risk
- Confidence in the decision is essential
Accepting this upfront avoids regret later.
The importance of advice and review
To summarise, Discounted Gift Trusts are technical arrangements that interact with trust law, tax rules, and long-term financial planning. Advice ensures the trust is set up correctly and remains suitable as circumstances change.
Altogether, regular reviews help keep plans aligned with reality.
- HMRC rules must be complied with
- Trust law governs structure and operation
- Personal circumstances evolve over time
- Tax rules can change
- Professional oversight adds protection
This safeguards both you and, especially, your beneficiaries.
Quick recap – Q&A
What is a Discounted Gift Trust?
A trust where you give away capital but retain a fixed income for life, with part of the gift potentially excluded from inheritance tax immediately.
How does a Discounted Gift Trust work?
In short, you place money into a trust, retain a lifetime income, and the retained income reduces the value of the gift for inheritance tax purposes.
Is the discount guaranteed?
No. The discount depends on age, health, and especially underwriting and may be smaller than expected or not apply immediately.
What happens if I die early?
In summary, the discounted portion remains excluded. The remaining value may still be considered for inheritance tax if death occurs within seven years.
A guide to DGTs: Final thoughts
A Discounted Gift Trust is a structured, long-term planning tool designed for people who want to give away capital while retaining income certainty. It offers potential inheritance tax advantages, but those benefits depend on personal circumstances, underwriting, and time.
Used appropriately, a DGT can provide reassurance, income stability, and clarity for future generations. However, it is not flexible, not reversible, and not guaranteed to deliver immediate tax savings. Careful planning, realistic expectations, and especially professional advice are essential.
FAQs
Read the list below of commonly asked questions about DGTs.
Is a discounted gift trust a good idea?
A Discounted Gift Trust can be a good idea if you want to give away capital while retaining a fixed income for life. Ity most suitable where income needs are predictable and affordability is strong. It’s less suitable where flexibility or future access to capital is required.
What are the disadvantages of a Discounted Gift Trust?
The disadvantages are especially a lack of flexibility and irreversibility. Income is fixed at the outset and cannot usually be changed, and furthermore, the capital cannot be reclaimed. If affordability is uncertain or income needs rise, other trusts may be more suitable.
What happens to a Discounted Gift Trust on death?
On death, in short, the retained right to income ends. The trust assets then pass according to the trust terms, usually to beneficiaries. Also, the discounted portion remains outside the estate and the remaining value may be assessed for tax if death occurs within seven years.
What happens to a Discounted Gift Trust after 20 years?
After 20 years, the trust continues in line with its original terms. There is no automatic end date. Income continues for life if applicable, and trustees manage the assets for beneficiaries. Periodic trust charges may apply depending on various factors.
What fees apply to a Discounted Gift Trust?
Fees can include advice costs, setup charges, investment management fees, and ongoing trustee or administration costs. Charges vary by provider and structure. Understanding total costs upfront is important, as fees can affect long-term outcomes and affordability.
Who provides Discounted Gift Trusts in the UK?
Discounted Gift Trusts are offered through financial advisers using trust deeds and investment bonds from established providers. The suitability of a provider depends on flexibility, costs, and investment options.
Glossary of terms and phrases
Discounted Gift Trust (DGT): A trust that allows you to gift capital while retaining a fixed income for life.
Discount: The portion of the gift treated as immediately outside your estate for inheritance tax purposes.
Actuarial calculation: A calculation using age, health, and income level to assess the size of any discount.
Underwriting: The assessment of health and life expectancy used to support the actuarial discount.
Settlor: The person who places assets into the Discounted Gift Trust.
Trustees: Individuals or professionals who legally control and manage the trust assets.
Beneficiaries: The people who ultimately receive the trust assets, usually after the settlor’s death.
Fixed income: A predetermined level of withdrawals paid regularly from the trust for life.
Irrevocable gift: A gift that cannot usually be reversed once assets are placed into trust.
Inheritance tax (IHT): A tax charged on estates above available thresholds when someone dies.
Potentially exempt transfer (PET): A gift that may become free of inheritance tax after seven years.
Seven-year rule: The period after which certain lifetime gifts fall outside the estate for inheritance tax.
Relevant property regime: The inheritance tax framework that applies to most discretionary trusts.
Trust registration service (TRS): HMRC’s system used to register trusts for tax and compliance purposes.
Capital growth: Any increase in the value of trust assets over time, usually passing to beneficiaries.
Flexible Reversionary Trust (FRT): An alternative trust offering optional access to capital instead of fixed income.
Affordability assessment: A review to ensure the retained income is sufficient, while meeting lifelong needs.