Clerical Medical Premier Bond chargeable event

We are instructed in the administration of the estate of a gentleman who, back in 1996, invested £100K in a Clerical Medical Premier Bond. It was held in a discretionary trust. This was a printed form and the Deceased filled in the blanks but on the small print of the form the Settlor was a beneficiary and therefore at his death it was settlor interested for IHT purposes. The Bond was valued at death at £284K and the Trustees would now like to cash it. It is administered by RL360 in the Isle of Man. Am I right that if it is cashed now, during the tax year of death, the chargeable gain is assessed against the Deceased and included in his tax return for the year of his death? I know the Trustees could choose to assign the Bond to a beneficiary, but she is domiciled and resident in the USA. I would be very grateful for advice as to the proper way to deal with this. The trust has never been registered. There has apparently never been a liability and the Deceased never took any payments from the Bond.

ITTOIA 2005 ss 465 and 467 are relevant.

It seems in your case the chargeable event gain does not occur due to the maturity of the life policy but due to its surrender by trustees post the individual’s death albeit in the tax year of death.

Immediately before the time of surrender (the key time) the individual had already died. At the time of surrender the trustees own the policy and it is the trustees who are liable under s467.

If the chargeable event arose on the maturity of the policy due to the individual’s death then immediately before this event the individual was alive and the gain would be his, not the trustees.

Malcolm Finney

Thank you. I had been looking at TSEM3210 for the person taxable. Many thanks for your clarification.

It would seem that this bond was on the life of the settlor and so normally it would mature on his death. If it was not on his life, there is a strange interpretation of S 465 ITTOIA by which the settlor continues to be liable for tax on any gain on encashment up to the end of the tax year in which he dies. We always think that death brings a merciful release from the clutches of HMRC but in these circumstances they seem to think it does not. See IPTM3240.

Thank you Malcolm. It was to mature on the death of the last life assured, that being the Settlor’s daughter. My understanding was as you say, that the gain would be assessed on the Settlor, as long as it was encashed during the tax year of his death.

As I understand the facts the policy did not mature on the death of the settlor if the policy, as seems to be the case, was written on multiple lives and the daughter is one of those lives and is currently alive which I assume is the case. The policy is thus still in force.

A chargeable event occurs on the surrender by the trustees post the settlor’s death albeit in the same tax year.

In this case the trustees are liable (s467).

Malcolm Finney

Interesting that the settlor was included amongst the discretionary beneficiaries. I wonder if that was what he wanted. I say this because I have come across a case in the last few years where the financial advisors who set up a similar Isle of Man Bond written in trust in September 2014, mistakenly allowed the settlor to be included amongst the discretionary beneficiaries. The settlor being still alive was astounded to learn that he had been included as he had no need to benefit since he had substantial other estate and the reason he had put money into the bond was with a view to saving IHT if he survived 7 years. Obviously he had not read the document he signed or had it fully explained to him. In the event the financial advisors through their solicitors made an application to the Isle of Man court for the removal of the Settlor as a beneficiary which was granted. However there is no certainty that if the settlor lives for more than 7 years from September 2014 but dies within 7 years from December 2019 when the court order was made, HMRC will accept that a GWR does not apply. The financial advisers’ solicitors think HMRC will. To safeguard the position the advisers were asked to provide an indemnity, which they did. Compensation has also been paid for the worry caused.

I wonder whether Gail’s deceased settlor’s PRs should get the matter investigated, particularly as settlor’s inclusion as a beneficiary was in the small print. Was he looking to mitigate inheritance tax by setting this up? A copy of the financial advisors report would no doubt help.

Patrick Moroney

Thank you. Certainly his family believed he had done this in order to mitigate IHT and they were very surprised to find that it was taxable. As you say, the list of discretionary benefuciaries was in extremely small print on the form and one might think it had not been properly explained to him. The only thing that throws doubt on this is that we have the Settlor’s copy of the settlement deed and the accompanying notes, and the latter has a small paragraph stating that no saving of IHT will result, which has been circled by the Settlor with a question mark. From that I assume he must have questioned this and been satisfied with the answer he received. It certainly would be interesting to see the advice he was given.

Yes I would want to know a bit more if I was advising. Is there evidence that besides the note that no saving in IHT would result, the advisers discussed that point with their client. As we know clients can be notoriously lax when reading documentation, particularly if they are elderly or indeed if they find it all too much to take in. There is nothing better than having notes like this backed up by a short letter and conversation with the client. After all the advisors are going to earn a handsome commission!

Patrick Moroney
BWL solicitors

The problem though is that it was 25 years ago and records may be long gone.

Having this evening re-read more carefully the ITTOIA 2005 provisions I would like to change my view expressed above.

At the date of the chargeable event (ie surrender by trustees) the settlor had already died but on his death the policy had not matured. The event occurred in the tax year of death of the settlor. I am now of the view that the deceased is liable to income tax on the chargeable event gain.

Had the chargeable event occurred in the tax year following the tax year of death the trustees would
be liable.

Malcolm Finney

Thank you so much Malcolm, that is a huge relief to me. Now I know how to proceed.

The precise basis and effect of the Manx court order could be relevant. It seems unlikely to an English lawyer that he would have been removed as a beneficiary just because he woke up to the IHT disadvantage, which presumably could have perhaps been cured out of court with a 7 year overhang by an effective disclaimer (in England by deed provided no prior acceptance of benefit).

The English doctrines of mistake and rectification, if operative on the facts, would prevent the 7 year wait (see 150 IHTA) and Manx law might have something similar. Here a favourable legal opinion on what the court order did might convince HMRC at relatively modest cost merely by correspondence.

I myself would not accept the excuse from them that the issue is hypothetical and they might be swayed by an express intention of an action for a declaration in England with costs if their excuses and refusal are judicially condemned. Iron fist in velvet glove!

Although I regard the Litigation and Settlement Strategy as largely hollow propaganda, observed more in the breach, it is “out there” and failure to apply it in a given clear-cut case, even to a “dispute” which is just incipient through announced intention, could be Wednesbury unreasonable.

Jack Harper

I’ve just noted Malcolm’s comment about the passing of 25 years in Gail’s specific case (and the difficulty of extant records and other cogent evidence). That difficulty may be insuperable but if it can be overcome, even by persuasive argument based on what is available, the effect of the inclusion of the Settlor, for income tax and IHT, being void now would be that it has always been void. This might be through operative mistake or entitlement to rectification. The PRs can engage HMRC by filing (or amending returns) on the basis of the inclusion having been void, asserting it in correspondence/negotiation, and appealing if HMRC refuses to accept that position without a court order, referring them to their LSS.

For example " Disputes must be resolved in accordance with the law. As well as being able to reach agreement on disputes involving decisions that are not formally appealed, as set out above, (see guidance on LSS paragraph 1) the law allows HMRC to reach agreement with a customer where a dispute has been escalated by appeal to the tribunal without the need for it to be resolved by the tribunal. These provisions allow HMRC to reach an out-of-court resolution. Whether an out-of-court resolution is of an appeal or not, HMRC should only do so on a basis which it believes could reasonably be determined by the tribunal. HMRC should also believe that the resolution gives the best overall return for the Exchequer, without going through the expense and uncertainty of taking the case to court. The starting point for HMRC’s view of what gives the best outcome to a tax dispute is what HMRC believes to be the likely outcome of litigation." and “in appropriate cases Alternative Dispute Resolution can help the resolution of disputes either by facilitating agreement between the parties or by helping the parties to prepare for litigation”.

A disagreement in correspondence over tax treatment is thus already a “dispute” for the LSS, even before an appeal is lodged. In the event of litigation my expectation (I am not a specialist litigator) would be that the void argument could be used as a shield (and not only as a sword in a preliminary separate action in which HMRC were neither joined or represented). While it is rather like little Red Riding Hood asking her Grandmother to kindly follow her own LSS, the fairy story did not take into account the 54th part of the CPR and there must surely be a legitimate expectation that HMRC should include that in its evaluation of “the likely outcome of litigation”.

Jack Harper

There seems to be an assumption that the trust was intended to be IHT effective. This might not be the case. This type of arrangement was promoted by life assurance companies/financial advisers as an arrangement that offered flexibility.
The settlor might have been reluctant to divorce himself from his capital so was retained in the class of beneficiaries.
The advice in 1996 might have been to ‘wait and see’ - the intention might have been to exclude the settlor at a later date.
The strategy might have been to benefit family members from time to time through advances of capital whilst retaining the possibility of advances to the settlor should some misfortune befall him.
Some advisers might have promoted this structure as a way of avoiding/reducing the need to contribute to the costs of long term care.

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Thank you, and you may well be right because, as mentioned above, a warning that there would be no saving of IHT had been annotated by the Deceased, but it seems he went ahead anyway. My query was really only to do with the chargeable event that will result when it is surrendered.