Distribution of life policy gain


I have a question upon which I would appreciate the groups view.

The situation is a discretionary trust has a life assurance policy. If the policy is encashed the trust is charged to income on the gain. Any actual tax paid (on top of the attached credit) is eligible to enter the tax pool.

My question is whether this gain can be distributed as income to the beneficiaries and use the credits in the tax pool?

My instinct is ‘no’ as it is not income for trust law purposes, only deemed taxable income, but I would appreciate the members views and if anyone has a reference?

I also would think that the best option will always be to assign the policy to the beneficiary before encashment, but I want to ensure I have understood both options properly.

Thanks for your help

Bronwyn Prior
Gepp & Sons Solicitors LLP

The question is whether what is distributed is income or capital. To determine this requires identification as to what is the purpose of the distribution. In Stevenson v Wishart (as I understand it) it was held that payments out of trust capital did not constitute income irrespective of whether the distribution was for an income purpose or not.

Life policies are capital assets although any gains arising although capital gains are not chargeable gains for CGT purposes (TCGA 1992 s.210).

I would therefore suggest that tax pool credits are not available to “frank” any distribution.

Malcolm Finney

Generally speaking assignment of the bond (or a number of segments of the bond) to the beneficiary will be more tax and cost efficient. The beneficiary can then hold / encash as they see fit and if a non or basic rate taxpayer (subject to the top slicing calculation) no further tax will be payable or reporting required.

John Cartlidge
Campion Solicitors