I have a discretionary trust with an investment bond.
The trust is earmarked primarily for one beneficiary and her family. The trustees would like to raise some cash to purchase a property for the beneficiary but due to her circumstances don’t want to assign bond segments to her on this occasion.
I am aware that encashing segments in the trust will trigger an additional income tax charge (the settlor is deceased). If the trustees appointed trust income to the beneficiary to convert the trust to an IIP trust, would this amend the tax rate on the encashment of segments of the bond or would they still be liable at 45% (subject to notional credit etc)?
When dealing with investment bonds you are looking at the chargeable event legislation. Whilst taxed as income any withdrawals are capital payments.
With both a discretionary and IIP trust if the settlor has died in the previous tax year and the trustees surrender segments the gain is subject to the trust rate of tax (45%). Notional credit may apply if the investment bond is onshore. The only way that the tax point can be moved to the beneficiary is to irrevocably appoint segments to the beneficiary (they become the absolute beneficiary) or to assign segments to the beneficiary outside of the trust.
If they appoint segments into a bare trust depending on her age she could request that the money is paid to her.
Kim Jarvis
No, converting the trust to an IP would have no effect on the taxation of any investment bond within the trust. If encashments are made by the trustees there will be a 45% income tax charge on the chargeable event gain (which may be less that then surrender proceeds if there have been no previous withdrawals). A UK bond will carry a 20% tax credit so the net tax would be 25% but on offshore bond has no such credit. As the trustees do not want to assign the bonds and presumably want to keep the property in the trust, they might perhaps consider borrowing against the value of the insurance bond to purchase a property and making 5% withdrawals from the bond each year to help fund the mortgage?
Maxine
Citroen Wells
I’m not sure from your question if it’s appreciated that because the proceeds of an encashment are capital under trust law, the amount of the taxable CEG within them isn’t ‘income’ for distribution to a beneficiary.