A Discounted Gift Trust scheme is a method by which you can place an amount of money in a trust, yet retain the right to receive capital back on a regular basis, which you can spend as income.

The trust investments need to be chosen carefully to try to ensure that the capital value is not eroded in the long term by the withdrawals paid out.

What are the advantages?

Potential immediate IHT saving.  The amount placed in the trust is notionally reduced ("discounted") at the outset for the purposes of calculating Inheritance Tax.  The extent of the discount depends on your age and state of health (a health questionnaire is normally required).  This usually results in an immediate potential saving on Inheritance Tax equal to 40% of the discount.

The size of the discount is subject to the scrutiny of the Inland Revenue Capital Taxes Office if you die within 7 years of setting up the scheme.

Any growth on the invested capital in the Trust is not part of your estate.

Depending on whether you have made other taxable gifts in the years preceeding setting up the trust, the entire amount will not be counted in your estate if you survive for 7 years.

What are the potential drawbacks?

A Discounted Gift Trust Scheme cannot usually be undone once it has been set up, and you cannot vary the amount of money withdrawn from the Trust.

The law could change in the future, rendering such a scheme less effective.