Bond with an element of Life Assurance - HMRC reporting

I have what appears on the face of it to be a Life Assurance Policy, which pays out on death of the deceased. The provider has given me the value of the life assurance policy as at the date of death, but also a chargeable gains certificate.
They have said the policy (which I can only assume is actually a bond) will need to be reported to HMRC if the deceased was a higher rate tax payer i.e. if he paid 40% tax, then only 20% has been accounted for. I believe the deceased was a higher rate tax payer.
Has anyone come across this and how I note this on the IHT400? And how I deal with the CGT?
Surely I wouldn’t note the plan value at the DOD, if £16,277 is then also liable to CGT as you would never usually have both, in which case do I even declare the CGT? I could understand if we are talking about income, but this is specifically referred to as gain?
Their letter says:
Amount paid: £18677.38
Previous chargeable gain £3400
Previous partial withdrawal £7000
Total premiums paid £6000
Chargeable gain £16277
Plan end date (date of death)
Amount of tax to be paid £3256
Number of years relevant to gain 31
Thank you in advance

Dear Christina,

A bond which is trigger by death has an income tax liability in the period to date of death so the final tax return - if a higher rate taxpayer (as you believe your client is). This should therefore be reported on their income tax return to the date of death and the additional 20% tax paid. It is not a capital gains tax liability, as it is an income gain liable to income tax. There may be top slicing issues but this can only be determined once other income for the period is included.

Presumably the net would therefore be an asset in the IHT estate.

I hope this helps.

Lucy Orrow CTA TEP
Lambert Chapman LLP

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As Lucy has said this is not a CGT asset but an event chargeable to income tax.

If the proceeds are payable to the estate then they are reported on IHT410. The additional Income Tax payable (if any once Top Slicing is taken into account) increases the income tax liability at the date of death reported in the main part of the iht400.

If I remember correctly, Top Slicing benefits individuals who would be basic rate payers without the gain but where the addition of the gain pushes them into the higher rates. If your deceased is a HR taxpayer for the period to death ignoring the gain then I do not believe TSR helps and the additional income tax liability will be £3256 (£16277 x 40% less £3256 tax credit)

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Thank you Lucy, this makes total sense.

Thank you for your reply. I can’t pretend this isn’t boggling me a bit.

The proceeds are payable to the estate, in which case, am I correct in thinking then that I just deal with it from an income tax perspective and report the income on the tax return up to the DOD, and then IHT will be payable on the net income that was due to the estate, which I report on IHT410?

Realistically I think I will probably need to add this to the cover letter and make this adjustment later as I do not know how much tax is liable on this asset yet as I am not sure of his income in the tax year up to his death.

(£16277 x 40% less £3256 tax credit) – presumably the £3526 is the income tax at 20% already paid

I came across one of these years ago, and not since then, so this is really helpful. Thank you for your comments

yes the £3526 is a tax credit and already paid over to HMRC.

The amount to report on the IHT410 is the amount received (unless the letter gives a different value at the date of death) ie £18677

For info the gain of £16277 is calculated from the proceeds received plus the amount previously withdrawn of £7000 to give £25,677 from which is deducted the previous gain of £3400 and the premiums paid of £6000

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On the basis that the “bond” was beneficially owned by the deceased at the date of death (ie the bond wasn’t held in trust as is common) then any chargeable event gain is that of the deceased ie such gain would be included on the deceased’s final tax return. If the bond is a UK bond there will be a 20% income tax credit; thus there is only net tax to pay if the deceased is liable at the 40% and/or 45%. Top slicing relief may apply.

For IHT the net proceeds (ie gross payment less the income tax charge) form part of the deceased’s estate.

Malcolm Finney

Thank you for your replies. Since speaking to the Executor and reviewing the information we have in respect of the deceased’s income, it appears his income producing assets were actually exceptionally low when compared to the size of his estate. As such, if no additional income tax is due, would I be right in thinking that the whole value of the bond should be noted on IHT410 i.e. the full payment of £18677 (there was no interest received after the DOD), regardless of how much of this was theoretically income owing just before the DOD, and capital? This seems right to me but I’d like to check seeing as everybody here seems so versed on these. I can’t see that it should be divided between income received (cash) and the bond capital sum itself.

Many thanks

My understanding of previous posts is that the full amount of the bond should be included in the IHT 400, with any tax liability being shown separately as a liability of the estate. The tax liability on the bond (if there is one) would normally be just an element of the overall figure for the tax adjustment for the year of death (it would not need to be separately identified).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

The full value should be reported on the IHT410 irrespective of the income tax position.

If the Chargeable Event gain creates/increases a liability to income tax for the final lifetime period that is not reflected in the values reported on the IHT410 but is added to the other liabilities in box 82 (page 9) of the IHT400. If there is not tax liability as a result there is no liability to claim