We have a discretionary trust with investments with considerable gain. Funds are required by the beneficiaries. It was decide to appoint out assets to them, holding over the gain so that they could then encash them and use their own CGT
allowances against the held over gain. However one of the investments is a policy on which a chargeable event subject to income tax is payable on surrender.
If the policy is transferred to the beneficiaries prior to encashment , how do we deal with holding over the gain since it will be taxed in the beneficiaries hands as income.?
The assignment of the investment bond from the trustee to a beneficiary (by way of an appointment/advancement not for consideration) does not trigger a disposal for income tax / CGT purposes, so there is no “gain” to be held over. When the beneficiary surrenders the policy, he/she will become taxable on all of the gain (and they pay income tax on the gain, as you say).
As the gain in the value of the policy is not subject to CGT, there can be no gain to held over for CGT purposes
My understanding is that the transfer of the policy to a beneficiary is not a chargeable event, so that no tax charge arises against the trustee at that time. It will only be when the beneficiary withdraws funds from the policy that a chargeable event occurs, and there may then be an income tax charge on them.
Hi Finula
It is possible to assign the policy to a beneficiary. Provided the assignment is not for money or money’s worth no income tax charge will arise on the assignment. It is only on surrender of the policy in the beneficiary’s hands that the income tax charge arises. The beneficiary will need to take advice on the tax charges that may arise as a result of the encashment.
Investment bonds are not subject to capital gains tax so holdover is not possible, but in any case irrelevant.
Care regarding exit charges from the trust though.
Most policies are not subject to capital gains tax so there will be no gain and so nothing to hold over.
The chargeable event gains legislation stands by itself. A transfer of a policy out of a trust for no consideration will not give rise to a chargeable event. Again, there is nothing that needs to be done to achieve that result.
I’m assuming the investment is a bond? As these usually will have a chargeable event on encashment.
Investment bonds (held in discretionary trust) don’t usually pay CGT - if you encash the income tax liable reverts to the settlor - assuming they are alive, UK resident and the bond is post 1998.
It ought to be noted that the bond is deemed to have paid 20% tax. You can assign segments of the bond to eradicate the liability in many cases.
Simplest to obtain a Deed of Assignment from the Insurer or Prepare Deed if insurer doesn’t supply requisite Deed, then simply Assign Segment to each beneficiary. Then it will be up to each beneficiary to take a withdrawal or encash his/her segment when he/she chooses.
If the Policy is UK based the insurer will account for basic rate tax on any Chargeable event gain (CE Gain) which arises at a partial withdrawal or at full withdrawal of the segment. No CE Gain arises when a policy is transferred to beneficiaries by Deed of Assignment. For IHT the value transferred will be the value at Date of Assignment.
