We have a client who died.
There was a Life Assurance Bond which was no in trust. There were two lives assured on this who were still living.
The Life Assurance Bond was encashed by the executors and there was an offshore Chargeable Event Gain. This arose during the period of administration.
I know that the Estate will therefore have to pay Basic Rate Tax @ 20%. There will be no top slicing relief.
Can I confirm our understanding that the ‘gain’ is not regarded as income for the purposes of the R185 certificate we will issue to the beneficiaries. This is because HMRC would regard the distribution of the proceeds to be capital - not income. If it is regarded as income, then is it non-savings, or savings income?
Following encashment by the PRs any event gain is simply treated as income of the estate with a 20% charge as the policy is “offshore”. On distribution to beneficiaries of the estate they will be subject to income tax as the distribution is one of income, not capital.
It is “aggregate income of the estate” :s466 ITTOIA. So it can only be taxed on a beneficiary with an absolute interest, A life tenant would not be entitled to it as it is not income for trust law purposes.
Gains on non-qualifying policies are taxed as income but are not otherwise income for tax purposes. However they can be treated as income by specific statutory provision e.g. under the Transfer of Assets Abroad legislation:s468 ITTOIA 2005 and ss714-751 ITA 2007. It seems to have been too much trouble to include in the latter a reference to the former. A straightforward investment in a foreign policy will probably meet the requirements of no tax avoidance purpose exemption. Provided that the policy is not a personal portfolio bond. A key feature is that the counterparty should exercise the investment selection which will be true of a bog standard bond. IHTM602980 is a quick introduction to tax mitigation (good) as opposed to tax avoidance (bad). This is a complex area and this part 600000 of IHTM, which used to be sparse and so full of FOI exclusions to be useless, is now very informative. The insurer should be prepared to assist with the diagnosis, probably with a disclaimer of responsibility, but the test is a subjective one and they may only be able to offer some type of feedback from customers/advisers as to their HMRC experience. Almost needless to say such due diligence would ideally have been carried out before investing.
There is some tricky tortuous wording in the law. s466 ITTOIA is the starting point. Subsection (1) charges the PRs only if the condition in Subsection (2) is met. The condition is: if the person liable to the tax charge had instead been an individual, basic rate credit would be ineligible because it is a foreign policy. So it is met. Subsection (3) says that where it is not met, I repeat NOT as is the case, then it is aggregate estate income (for the owner of an absolute interest) under s664 (2) (e) ITTOIA 2005. So when the condition is not met, as here it is not, the gain is chargeable on the PRs without basic rate credit to pass on. However that provision charges as aggregate estate income what would have been the PR’s income if the condition in s466(2) had not been met. Confused? Join the club. The outcome seems to be that the PRs are chargeable but not ever being liable at basic rate with no credit. The beneficiary is charged (if applicable) at rates above basic rate but with a credit at basic rate; you must for this purpose assume the PR’s were entitled to that credit so that the actual charge to them can be passed through. Ludicrous and Labyrinthine, bringing the drafting into disrepute if anyone cared, which they don’t, “as any fule no”.
Whilst the language is a bit tortuous the conclusion in the present case ie a foreign non-qualifying life policy and sale by the PRs seems clear which is that the beneficiaries receive income (not capital) arising from the chargeable event gain and R185(Estate) should be completed (utilising Box 17).
As a barely reconstructed but non-violent Old Fenian, unashamedly always and still pro-Treaty, I am long a devotee of the Great Man. I now fully appreciate the great wisdom behind his line “Now must I wither into the truth”. He’s number 2 in my top 5 but yer man Macneice is number 1 with Heaney, Longley and Kavanagh.
So I think the PRs must pay tax at basic rate (not assumed to have been paid because of s531) and the absolute interest beneficiaries are taxable at higher rates with a credit for the tax paid by the PRs. This tax is available for repayment unlike that treated as paid under s530 ITTOIA. A beneficiary with a limited interest or a discretionary interest is not chargeable, despite the PRs being charged at BR, because they are charged on sums received. The policy gains are not income for trust law purposes and the trust instrument will only entitle them to receive trust income or distributions from it.
HMRC’s view is that such gains are taxable under s479 ITA. TSEM3201 and 3210. This is based on ss 481 and 482 (type 7). It follows that tax due will enter the pool. Tax on gains with a BR notional deduction enter the pool only to a limited extent:s498 (Type 3a). All tax on foreign policy gains enters. But can it ever be used to frank distributions. Trust instruments will invariable entitle beneficiaries to income for trust law net of expenses properly chargeable to income. Tax on policies is surely chargeable to capital.
A life tenant with a Baker v Archer Shee look through to sources tax treatment will not be entitled to policy gains nor will discretionary objects if only entitled to income. Distributions of capital, to which they may also be entitled at trustee discretion, will not be taxable as income anyway. So the pool entries will be wasted. Theoretically the trust instrument could entitle them to policy gains as if they were income but there is no alchemy that can then make them income for tax purposes in the absence of a statutory provision. I have never personally seen one that did. Policy gains are taxable on the settlor, or an individual beneficial owner, or trustees or PRs. s466 ITTOIA is really an example of a beneficial owner being charged who is only ultimately such and not during the Admin Period. An individual life tenant or discretionary object is never chargeable under the statutory scheme equating policy gains with income.
Jack I’m not sure I’m understanding your posts. The original query involves no trust aspects and in this regard I would have thought was straight forward (as per my suggested responses).
In you latest post you say:
“HMRC’s view is that such gains are taxable under s479 ITA. TSEM3201 and 3210”.
Surely you mean ITTOIA 2005 s466?
As regards “This amount of estate income does not retain any characteristic for the beneficiary, other than “savings income”, so top slicing relief is not available for the beneficiary.” Croner describes this statement as ‘HMRC’s view’.