Trust Offshore Chargeable Event Gains

Trusts Discussion
1

We are dealing with the administration of an Estate. In the same tax year as death there were offshore chargeable event gains for the surrender of policies written in Trust. No tax was treated as paid and the proceeds were paid to the Trustees. The terms of the Trust are not known.

The Accountants dealing with the personal tax return to the date of death advised that the chargeable event gains were taxable in the administration period as the policies were surrendered after death. A second firm of Accountants declared the chargeable event gains informally to HMRC at the end of the administration period and the LPRs paid tax at 20%. On this basis it is understood that the chargeable event gains and tax paid by the LPRs would be vouched to the residuary beneficiaries who may be assessed personally on this income at higher rates.

However, should chargeable event gains for the surrender of policies held in Trust (including foreign policies), in the same tax year as death, be assessed on the date of death personal tax return?

When a Settlor is alive there is a right of re-imbursement from the Trustees which would be a chargeable transfer if the tax is not recovered. Does this right extend to the circumstances above so that if tax is paid on the personal date of death tax return for trust chargeable event gains and is not recovered from the Trustees, it is not a deduction from the value of the Estate for IHT purposes?

Adrian Forster TEP
Hibberts LLP

2

The person liable for income tax on any chargeable event gain is provided for in ITTOIA 2005 s464 according to how the rights under the policy are held immediately before the relevant chargeable event.

In the current scenario the relevant event (ie surrender by the trustees) occurred after the death of the settlor/creator of the trust (assumed not to be a bare trust) but still in the tax year of death of the settlor/creator.

Assuming the settlor/creator was resident in the tax year of death, as s465 Condition B is satisfied (s465(3)) then the liability on the event gain is that of the settlor/creator. There is then no need to consider s467 (under which the trustees may be liable).

Had the relevant event (ie surrender of the policies) occurred in any tax year following the settlor/creator’s death then the liability would fall under s467 ie trustees would have then been liable (as settlor/creator would be dead).

Given the liability of the settlor/creator then the right of reimbursement applies (s538 and s467(7)).

Malcolm Finney

3

Just to add to my above post:
Any failure to seek a reclaim of the settlor/creator’s liability under ITTOIA 2005 s538 could it seems give rise to a potential IHT liability under IHTA 1984 s3(3) (see SP5/92 para 9 albeit in the context of TCGA 1992 Sch 5 para 6).

Malcolm Finney