I have been consulted by trustees of a will trust. The deceased died in 2009 and a share of the estate was left to a great grand child if he reached the age of 25 years (with gift over to another if he failed to reach that age). The great grand child reached 25 years a few months ago and asked the trustees to encash the bond that they had invested the money in. There was a gain when they encashed it but for information had been no income during the lifetime of the bond as they invested for capital growth. The amount involved is well under any IHT levels.
The query is that the accountants that they have spoken to have told them its still a discretionary trust (even after his 25th birthday) so the gain is taxable as income on the trustees and the beneficiary can’t claim any of the tax back. I was thinking that since the contingency was met by the beneficiary on his reaching his 25th birthday the interest became automatically vested at that date so would be a CGT chargeable event on his birthday for which holdover relief could be claimed by the trustees. Thus when the trustees later encashed the bond at the request of the beneficiary at that stage it would be taxed on the beneficiary not the trustees as he was then absolutely entitled to it?
Any help would be appreciated to ensure that it is dealt with in the correct way.
The tax is paid by the trustees. The accountant is correct on the taxtation. 45% you would receive a 20% credit. Tax payable is 25%. (Subject to the type of investment bond).
However the trustees may have the option to assign the bond to the beneficiary and tax would be paid at his rate in this instance.
In addition top slicing relief for the entire period is available to them. As if they owned the bond from inception.
Not all bonds are equal - I don’t know the type etc. It’s maybe worth looking at the option. I’d seek advice on the assignment if you consider this route, IHT exit charge maybe applicable.
I am not sure that I entirely agree with Richard, although I am making some assumptions (as I believe he is) as to the type of bond. We are assuming it is an investment bond, and that the tax in question is income tax on the chargeable event gain.
Where a bond is held in trust, the gain is only taxable on trustees in various specific circumstances. In the HMRC guidance in HS320, it states that the gain is taxable on the trustees where the rights “are held on non-charitable trust and no individual or personal representatives are otherwise chargeable.” Earlier in the guidance it gives examples of when a gain would be taxable on an individual, and these include where " you may be the beneficiary of a bare trust".
It therefore seems to me that if the bond is held on bare trusts at the time of the surrender, the gain is taxable on the beneficiary or beneficiaries of that trust, regardless of whether or not it has been assigned to them, or whether it is still held by the trustees. If it is still held by the trustees, the chargeable event certificate will be issued to them, but that doesn’t mean that the gain is necessarily chargeable on them. It is quite fun working through the legislation, but I have done that and come to the same conclusion.
In Danielle’s case I am inclined to agree with her, that the beneficiary attained a vested interest on reaching 25 and from that point the trustees were holding on bare trust for him. On that basis, and assuming it is an investment bond, this would mean that the gain is taxable as the beneficiary’s income.
Have you say I’m rather confused - the question states its a discretionary trust?