Trust deeds and trust law – technical Q&A

9 July 2024

Julia Peake, technical manager at Nucleus Financial, provides some insights into real world technical questions asked by advice firms dealing with the complexities of trusts.

When it comes to the subject of trusts, depending on the level of knowledge and experience in dealing with trust deeds and trust law it can be confusing and sometimes overwhelming when trying to advise our trustee clients.

Here are a couple of questions that have been asked recently and the answers we gave.

[Please note that we are not regulated to give, financial, legal or tax advice and the information provided should be confirmed with qualified person who are regulated and specialise in those areas. Nucleus Financial take no responsibility for any action or inaction taken on the information given below.]

Q: What are the tax implications if the younger lives and/or the beneficiaries die before the donor/settlor of a Discounted Gift Trust (DGT) who has retained rights which are payable?

The taxation implications will depend on the type of trust involved and if it has been set up on a discretionary or absolute basis.

If the trust is discretionary, then there is no IHT considerations for the beneficiary as they have no entitlement to the trust fund. The trustees have absolute discretion about who benefits, when and by how much.

If the beneficiary of an absolute DGT pre-deceases the settlor, the value of their share of the trust will have a value. This will be included in the beneficiary’s estate for IHT purposes, even though the estate may not receive anything until after the settlor has died.

The value of the deceased beneficiary’s share is the market value of their rights to the trust. They are calculated in a similar way to the 10 yearly charge in that the present value of the trust fund is discounted to account for the fact that the settlor is continuing to receive payments, and nothing is payable to the beneficiary’s estate until after the settlor dies.

If the last life assured dies prior to the settlor, the policy will end and should pay out the death benefit. Under the terms of the trust, the trustees need to reinvest the trust money and set up withdrawals to satisfy settlor’s retained rights. In the meantime, they either continue to pay settlor payments from cash or pay them a lump sum of ones they’ve missed prior to reinvesting.

Q: Is an investment bond a suitable investment for a Will trust?

This will depend on the provisions set out in the Will to determine the type of trust involved.

It will most likely be a discretionary or an Immediate Post Death Interest trust (IPDI), which is essentially an Interest in Possession (IIP).

If it is a discretionary trust then it is up to the adviser to make suitable recommendations to the trustees based on the information they collect, the purpose of the trust, the requirement of capital/ withdrawals, the time frame of the investment, if the investment is permitted, if it would be a suitable investment for the benefit of the beneficiaries as if there is a contingency in place of less than 5 years then an investment bond might not be appropriate. They will also need to consider the reporting requirements on the investment they hold and their duties under the Trustee Act 2000.

 If its an IPDI we need to remember there are usually 2 classes of beneficiaries, the life tenant, who has the right to either occupation if property or the income from the trust property during their lifetime and the remaindermen, who have rights to the capital after the life tenant’s death in most cases. Suitability depends on the wording of the Will and what the life tenant is entitled to under the terms of the Will trust. See IHTM16066 – Interests in possession: what if there is no income? – HMRC internal manual – GOV.UK (

If the IPDI/IIP beneficiary is only entitled to income, then a bond wouldn’t usually be suitable as it is not an income producing asset. There would be a requirement on the trustees to invest in income producing assets such as shares, collectives or fixed interest securities bearing in mind the beneficiary’s need for income and tax consequences of providing this.

It’s possible that a clause has been written in to allow the trustees to appoint capital to the IPDI/IIP beneficiary. Some Wills allow for income only and others allow for appointments of capital to the IPDI/IIP beneficiary. The Will would usually have been tailored to the settlor’s wishes and it may also depend on the life tenant’s requirements. In these circumstances, then, if appropriate, the trustees can invest in income producing assets (GIA/Collective) or a bond, offshore or onshore.

There would normally also be a clause added which provides the trustees with wide powers of investment, it wouldn’t necessarily need to be specific to a particular investment vehicle.

The advice on this would be based on the objectives and needs of the trustees, who consider the requirements of the IPDI/IIP beneficiary, as well as the remaindermen.

What are some of the key factors we should consider when assessing suitability for a Discounted Gift Trust?

Aside from the legislative duties under the Trustee Act 2000, you will most likely need to consider, and this list is not exhaustive, the following.

  • The requirement for fixed withdrawal for life or until the fund is exhausted- this is key as for most DGTs once established we cannot waive or stop the withdrawals for the settlor so they may build up in the estate.
  • Get the underwriting done first- this will establish the discount which would be available.

Age and health of the client, if they are over 90 or in ill health, the discount would be negligible or even 0%.

  • You will need to consider their gifting history in the 7 years prior to establishing this trust especially if this is a discretionary version. CLTs are cumulative.
  • The relevant property regime applies and there is potential for entry, principal 10 year and exit charges on distributions to the beneficiaries if discretionary. These will need to be reported to HMRC by the trustees on their tax returns if tax is due.
  • Single/ joint life
    • A jointly settled DGT is deemed to be 2 equal settlements, where each settlor is able to use their available nil rate band, potentially meaning avoidance of any IHT entry charge on the value of the gifted element of the investment if within 2 x NRB. In a similar way, at the 10 year anniversary, the available NRB for each settlor would be applied at that point. So, on a like for like basis, the 10 year fund value for each ‘life’ would be the same. This does assume that the underwriting at the 10 year anniversary, in calculation of the retained rights for each settlor, does not change for any reason.
    • Joint settlor discount will be calculated separately. This could be a concern if there is a large age gap and consideration should be given to whether the fund would run out for younger settlor.
    • You may get a larger discount for joint. But again, remember each person is underwritten separately so their age and health at the time is a key factor here.
    • If set up with a single settlor, then the settlor is still excluded, but after their death, the trustees could appoint benefits to the widow or widower without worrying about Gift with Reservation or Pre-Owned Asset Tax (they would have to include widow/widower into the class of beneficiaries under our trust)
    • Single settlor trusts could also be more advantageous if each settlor has different amounts of available NRB – joint settlements are usually seen as 50/50 gifts unless a different proportion is documented.
    • the settlor/s have different income tax brackets – this would only really come into play for joint settlors if there were a Chargeable Event Gain (CEG) causing an income tax liability on the settlors (see discretionary gift trust tax notes), as the gain would be split 50/50 and taxed on each individual’s marginal rate. This could also be an issue on a joint settlor trust if there is a CEG and one settlor has died in a tax year prior to the gain arising, then their share (remember it is split 50/50) would be assessed at trustee rate of tax.

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