Discounted Gift Scheme. Will your estate be hit by Inheritance Tax? Inheritance tax planning. A guide to how it works. For UK residents only

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1 Inheritance tax planning Will your estate be hit by Inheritance Tax? Discounted Gift Scheme A guide to how it works For UK residents only The tax information provided in this Guide is a summary based upon Legal & General s understanding of tax law and HMRC practice which are subject to change. Wealth Management made easier by Legal & General

2 An explanation of some general terms Assets Assets can be owned solely or jointly and are either: Immoveable property, for example land or a house. Moveable property, for example cash or shares. Beneficiaries The people who may or will receive the Assets held under Trust other than the Donor. Please note for the purposes of this document where we say beneficiaries, that is no capital b, this can be defined as any person(s) or body who has a beneficial interest in the Assets held under Trust. Bond The Discounted Gift Portfolio Bond. Discount The actuarial calculation of the present value of the regular payments, as set out in the Trust, to be paid to the Donor during their lifetime. Discounted Gift Valuation The written communication to the Donor that includes a personal valuation of the Discounted Value of the Investment. Discounted Value of the Investment The discounted or reduced value of the gift for Inheritance Tax purposes. This will be the value of the gift less the Discount. Donor The person (or persons) who makes the gift by putting Assets into the Trust. There may be one or joint Donors. Joint Donors must be married or registered civil partners. Gift The Discounted Value of the Investment. Please note for the purposes of this document where we say gift, that is no capital g, this can be defined as the initial amount put into Trust by the Donor. HMRC Her Majesty s Revenue & Customs. They are responsible for the collection of taxes. Inheritance Tax A tax that can be charged on lifetime gifts and on death. Lives Assured The persons on whose lives the Bond depends, each of which is a Life Assured. The death benefits are payable on the death of the last Life Assured to die. Nil Rate Band On death, the Donor is allowed to leave up to 325,000 (current threshold for tax year 2009/2010) to the Beneficiaries, without incurring any Inheritance Tax. This amount is known as the Nil Rate Band. Regular Withdrawals Regular encashments from the Bond that are used to provide the Donor with regular payments. Scheme The Discounted Gift Scheme. Trust The legal arrangement whereby money is held by the Trustees for the benefit of the Beneficiaries and which gives the Donor their entitlement to regular payments during their lifetime or until the Trust Assets are exhausted, if earlier. Trustees The people who operate the Trust. They make the investment into the Bond and arrange payment to the Donor and the Beneficiaries. Valuation Certificate Document stating the Discounted Value of the Investment. For ease of reference these terms have been given capital initial letters wherever they are used. Further details about the terms of the Bond are in the Product Details available from the person giving advice on this Scheme.

3 What is Inheritance Tax? Inheritance Tax is a tax charged by HMRC. It is charged on the wealth you have accumulated during your lifetime and wish to pass on, or transfer to your family or other Beneficiaries. Key benefits of the Legal & General Discounted Gift Scheme The potential to immediately reduce the value of your estate for Inheritance Tax purposes. Allows you, the Donor, to make a gift and retain the right, in the form of regular payments, to some of that gift. Convenient, tax efficient regular payments for you, for life or until the Bond is exhausted. Allows you to pass on some of your wealth to your family or chosen Beneficiaries on your death. Available for single or joint Donors. Opportunity to invest in a Legal & General Discounted Gift Portfolio Bond. An extensive range of funds available to meet most investment needs and potential to spread the risk of investment. Discussions have taken place with HMRC and they have confirmed that they are satisfied with the actuarial basis and approach being adopted for the Scheme. HMRC reserves the right to review cases individually.

4 Can the Legal & General Discounted Gift Scheme work for you? You can reduce your potential Inheritance Tax bill and still retain some rights to your capital This can be done by the Legal & General Discounted Gift Scheme. What is the Discounted Gift Scheme? Our Discounted Gift Scheme allows you to make a gift during your lifetime to your children, grandchildren or other chosen Beneficiaries, which can reduce the value of your estate and so, the amount of Inheritance Tax due. In addition, you retain the right to regular payments during your lifetime, so you still have access to some of your gift and you can also retain some control over what happens to it. Legal & General s Discounted Gift Scheme combines our bespoke: Discounted Gift Trusts Discretionary Trust Flexible Trust Absolute Trust and Discounted Gift Portfolio Bond. In the Trust you name the Beneficiaries and appoint the Trustees. The Trust will also include a provision that requires the payment of regular amounts to you. The Trustees have the responsibility to invest the Trust Assets appropriately, and under the Scheme, will invest all the gift into a Legal & General Discounted Gift Portfolio Bond. How it works You decide how much you need in the form of regular payments for your lifetime from the gift and we calculate a value for these regular payments. This value is called the Discount and is based on your age, your gender, the amount of regular payments you want to receive and your current state of health.

5 If, from the information you provide, you are accepted for the Scheme, the value of the original gift for the purpose of calculating any Inheritance Tax charge, is reduced by the amount of the Discount. Using this Scheme means that the gift you make has the potential to be discounted, to immediately reduce your liability to Inheritance Tax. Discounted Gift Scheme creates two rights: The Donor s right under the Trust to Regular Withdrawals from the Discounted Gift Portfolio Bond during their lifetime or until the value of the Bond has been exhausted. The Beneficiaries right under the Trust to the remainder of the Trust Assets after the Donor has been paid their regular payments during their lifetime.

6 How to set up the Scheme Step 1 Donor Questionnaire You complete the Legal & General Discounted Gift Scheme Donor Questionnaire. This questionnaire includes a short list of lifestyle and health questions that you must complete. It also requires you to sign a declaration and consent for Legal & General to contact your doctor to request a General Practitioners Report (GPR). We need the GPR so that we can make an assessment of your health. We will use this, together with the amount to be invested, your age, gender and the amount of regular payments required, to calculate the Discount and provide you with a personal Discounted Gift Valuation. Please note: without your consent to Legal & General obtaining a GPR from your doctor, we will be unable to proceed with setting up the Legal & General Discounted Gift Scheme. At this stage, ONLY the Donor Questionnaire should be sent to Legal & General. Step 2 Underwriting the Donor and obtaining a personal Discounted Gift Valuation On receipt of the Donor Questionnaire, we will write to your doctor for a GPR (in the case of joint Donors, we will obtain a GPR for each of you). Please note we will pay for the GPR. When we receive the GPR from your doctor, our team of specialist medical underwriters will make an assessment of your health. If further information is required to do this, we will obtain further medical evidence. If we are able to provide a valuation and you are accepted for the Scheme, we will send your adviser a personal Discounted Gift Valuation. This includes: A written valuation of the Discounted Value of the Investment including, in the case of joint Donors, a breakdown of the amounts apportioned to each of you and A list of the items required to proceed with the application. If we are unable to provide a personal Discounted Gift Valuation, we will write to you with the reasons why. A full range of product literature for the Discounted Gift Scheme is available from your adviser. Whilst there can be no guarantee that HMRC will not challenge the Discounted Value of the Investment, we are committed to ensuring that our procedures are robust enough to protect our customers expectations and defend the adviser s position as far as possible. We believe that obtaining a GPR for the Donor is the best method to ensure this.

7 Step 3 Setting up the Discounted Gift Trust If you accept our Discounted Value of the Investment, you should complete one of our Discounted Gift Trusts, described on the next page. You should decide who you want to appoint as Trustees you are automatically included as a Trustee and should ensure that there are always at least three persons acting as Trustees unless a professional corporate Trustee is appointed. You need to complete the section of the appropriate Trust entitled the Donors Rights to confirm the amount of regular payments you require and the frequency of payment. See the Discounted Gift Scheme Key Features for details of your options. You need to choose who you wish to ultimately benefit from the proceeds of the Bond and other Trust Assets (if any) after your death. The Trustees are the legal owners of the Trust Assets. They are responsible for holding and managing the Trust Assets for the benefit of both you and the Beneficiaries. Step 4 Applying for the Discounted Gift Portfolio Bond The Trustees complete the Discounted Gift Portfolio Bond Trustees Application, ensuring that PART 6 the Donor s rights Regular Withdrawal details matches the requirements set out in the Trust. The applicant(s) will be the Trustees. At least two Lives Assured, and no more than six, must be chosen. At least one of these must be younger than you. It is not possible for you, or your spouse or registered civil partner, to be included. Your adviser will send us the completed Trustees Application, the appropriate Discounted Gift Trust and a cheque for the investment into the Bond. Payment of the investment You, the Donor, must provide the money for the investment. If you are applying as a sole Donor, you must be the only person to provide the money. If you are applying as joint Donors, the money must be provided in equal shares either from your joint account, or alternatively you can each provide half from accounts in each of your own names. Alternatively a bank account can be set up by the Trustees for the purpose of running the Trust. Step 5 Setting up the Bond Once we have received all the documents, the Bond will be set up. We will send the Trustees a policy document which details the terms and conditions of the Bond. A Discounted Gift Portfolio Bond Valuation Certificate will be included with the policy document which shows the Discounted Value of the Investment. Details of the general tax position and the risks involved with setting up a Discounted Gift Scheme are included within the Discounted Gift Scheme Key Features. It is important that you read this document carefully, so that you understand how the Scheme works and the risks involved.

8 How does the Legal & General Discounted Gift Scheme work? The lifecycle of our Discounted Gift Scheme Day 1 Day 2 Discounted Gift Trust The Donor sets up a Discounted Gift Trust and makes a gift of money to the Trustees. Discounted Gift Portfolio Bond The Trustees then invest the gift into a Legal & General Discounted Gift Portfolio Bond. The Discounted Value of the Investment is calculated by deducting the Discount from the value of the gift. The Bond continues until: a) the Trustees cash-in the Bond (generally not possible until after the death of the Donor), or b)the death of the last Life Assured, or c) its value is exhausted. The Donor receives regular payments from the Bond. For example, 5% of the initial investment during their lifetime. The Discounted Value of the Investment is used for the calculation of Inheritance Tax.

9 The Trust continues after the Discounted Gift Portfolio Bond has been cashed in or paid out on the death of the last Life Assured. The Trust continues until the Trust Assets have been fully distributed to the Beneficiaries. See IHT: Factsheet for details of any potential Inheritance Tax liability due.

10 Discounted Gift Trust When you make your gift under this Scheme, it is done by creating one of the following Trusts: Discounted Gift Discretionary Trust Discounted Gift Flexible Trust Discounted Gift Absolute Trust Your adviser will help you decide which is the appropriate Trust for you. There are three parties involved when the Trust is created: You, the Donor. The Donor establishes the Trust and makes the gift. The Donor can be one person or there can be joint Donors, with a spouse or registered civil partner, The Trustees, The Beneficiaries. The Trust defines how much the Trustees should give you as regular payments during your lifetime (up to a maximum of 10% of the amount gifted), and your chosen Beneficiaries who are to receive the remainder of the Trust Assets. Discretionary and Flexible Trusts Trusts that allow you to name a very wide range of potential Beneficiaries and give the Trustees a considerable amount of discretion in determining who will ultimately benefit. For Inheritance Tax purposes the Gift into the Trust is a chargeable lifetime transfer. This means that there will be an immediate Inheritance Tax charge if the value of all chargeable lifetime transfers made in the last seven years (including this Gift) is greater than the current Nil Rate Band. Once you have set up the Trust you will need to declare the Gift to HMRC by completing their IHT100 form. Any tax charge then becomes due between 6 and 12 months later, depending upon the date of the gift. Further Inheritance Tax may become due in the future, depending upon how long you live and/or when the Trust Assets are distributed to the Beneficiaries. Our IHT: Factsheet, available from your adviser, gives more details

11 Absolute Trust With this Trust you name your Beneficiaries, along with their percentage shares, and no changes can ever be made. The Trustees are also obliged to inform the Beneficiaries of their entitlement (if a minor it must be done when they reach age 18). An Absolute Trust is potentially more favourably treated for Inheritance Tax purposes than the Discretionary and Flexible Trusts. They are treated as a potentially exempt transfer, which means there is no immediate Inheritance Tax charge. There will only be an Inheritance Tax liability on the Gift into the Trust if you die within seven years of the date of the Trust. See IHT: Factsheet for more details. Discounted Gift Portfolio Bond The Bond is a single premium life assurance contract used for medium to long term investment purposes. It has no fixed period, although it should be held as an investment for at least five years. The Bond can be wholly or partially cashed in by the Trustees at any time after your death. It is possible to make partial encashments during your lifetime, but only to cover certain payments that may become due as a result of operating the Trust. Rather than cashing the Bond in, it can be left until the death of the last Life Assured. Your Trustees should choose people to be Lives Assured who are likely to live longer than you to give them the option of leaving the Bond to provide investment benefits for the long term, even after your death. Anybody, other than you or your spouse or registered civil partner, can be named as a Life Assured, but it is generally advisable to name Beneficiaries. Up to six lives are allowed. The minimum investment is 50,000. An extensive range of investment funds is available. The regular payments you state in the Trust will be made by Regular Withdrawals from the Bond and will be paid, unchanged, throughout your lifetime or until the Bond is cashed in, if earlier. Due to the nature of the underlying investment funds, the value of the Bond may go down as well as up and the returns are not guaranteed. This means that the Trustees could get back less than your initial investment and your regular payments could potentially stop if the Bond no longer has a value. For details of the charges on the Bond, please see the Key Features document, available from your adviser.

12 Legal & General Assurance Society Limited Registered in England number: Registered office: One Coleman Street, London EC2R 5AA A member of the Association of British Insurers W /09 Approved: 07/07 H72585 At least 55% of this paper is made from recycled materials.