It’s that time of year again… when normally straight forward questions appear to be more than my tax deadline drained brain can handle!
Discretionary Trusts and chargeable event gains where the proceeds have been distributed to a beneficiary. I’m coming to an unfair result but I can’t see anything to support a different view.
The chargeable event gains are chargeable on the Trustees as usual at the Trust rates. The income tax paid enters the pool. However, rather than the payment of the proceeds to the beneficiary being income and having the appropriate credit attached which would result in a repayment in their hands the payment out to the beneficiary of the chargeable event proceeds is from their perspective a capital payment. So no tax due by the beneficiary and potential IHT charge (which is likely to be nil). The proceeds represent the bulk of the trust capital so the income tax paid by the Trustees on the chargeable event is just lost as there will be no income payments made to use the pool.
It seems unfair but I just can’t find a basis for the payment of the proceeds to the beneficiary to be an income payment so we can reclaim the tax paid through his return. Am I missing something?
My understanding is that only the 25% income tax paid by discretionary trustees goes into the tax pool (ITA 2007 s 498 makes it clear that the notional 20% tax credit does not fall into the trust’s tax pool; thus, only 25% (ie 45% less 20%) falls therein).
A 45% income tax charge would fall into the tax pool had the bond been an offshore bond.
As the bond’s proceeds are capital, on distribution the 25% tax payment is not available to frank it and no part is recoverable by the beneficiary recipient.
Where the trust holds an offshore bond and a chargeable gain occurs the gain is only taxable at the rate applicable to trusts (45%) if the settlor has died in a previous tax year - I assume that the settlor has died in a previous tax year. Any distribution to the trust beneficiaries of the policy proceeds would be a capital distribution and so an exit charge for IHT purposes may occur.
Kim Jarvis
Vitality
The solution to the income tax problem (if you have a Tardis) is to assign the policy to the beneficiary before surrender. Having more than one life insured reduces the chance of the settlor’s death being a (non-voluntary) chargeable event. I wonder if the trustees took advice before the surrender, if the event was a surrender.
Most has been said already here.
If the settlor is alive, the settlor’s rate of income tax applies and not the trust. The settlor rates applies in the event the settlor died in the same fiscal year as the chargeable event. This would be the case if the settlor was the only life assured. The settlor’s tax position should have been considered when the bond was established.
If the settlor is deceased and died in a fiscal year before the year of the chargeable event then the RAT applies if surrender takes place in the trust which it has in this case.
Prior to surrender the trustees should have considered the tax position of the beneficiaries prior to surrender. In order to mitigate some tax, the policies should have been assigned to the beneficiaries and then surrendered by them. The assignment does not trigger a chargeable event providing this is done for no consideration. The income tax due is then assessed on each beneficiary making the surrender.
The beneficiary may have chosen the surrender segments of the bond over a number of years to mitigate income tax further and/or assignment could have been made or a number of beneficiaries by the trustees or assigned on by the beneficiary to say other family members to reduce the total income tax.
By the trustees surrendering, these opportunities are lost. The trustees may have dropped the ball somewhat here.
Hope this assists.
Bob Massey
Private Client Directorr
Countrywide Tax and Trust Corporation.