A settlor lends money to trustees of a discretionary trust from which settlor and spouse are excluded. The trustees purchase an investment bond.
During the lifetime of the settlor any chargeable gains arising to the trustees on the bond are taxed upon the settlor personally.
But what if - all during the life of the settlor - the trustees appoint and assign a segment of the bond to a beneficiary (not the settlor, of course) who later encashes it? Does a chargeable gain arise upon the appointment/assignment? If so is there another chargeable gain upon the encashment? Or is there only one chargeable gain, upon the encashment?
And whichever is correct, does the tax on the chargeable gain fall on the trustees? Or on the beneficiary personally? Or on the (still living, remember) settlor?
The assignment for no value is not a chargeable event. Any subsequent chargeable event, occurring afterwards while in the ownership of the initial assignee (or his assignee) will not be taxed on the original settlor but on the then owner of the bond or as settlor if he then settles it).
The history of the bond follows it in determining the computation of the chargeable amount on a post-assignment event.
HMRC’s IPTM and HS320 are very helpful. As ever, typical transactions are straightforward but more complex ones can be convoluted.
It is in essence anti-avoidance legislation so largely in terrorem. However, because by now it is nonetheless a well-trodden path of legitimate investment via a fancy wrapper, and because insurers enjoy above-average political clout, it can be a useful and predictable tax planning stratagem, especially when written in or transferred into a trust.
In particular the gratuitous tax-free assignment of a bond to a non- or lower rate-taxpayer, perhaps after the 5% annual tax-free withdrawals have been wholly or largely made, is a recognised low-key tax planning strategy. Bonds are often written in individual clusters rather as a singleton and it may be better to cash in one or more of them in full rather than make part surrenders of all or a large number.
A USP is that the in-house tax experts of the insurers are on top of their game and I have not known them to charge for clarifying the tax consequences of a proposed dealing with their own company’s product.
The trustees have assigned a ‘segment’ to a beneficiary. A segment is an independent policy - one of perhaps 100 identical policies which form a ‘bond’.
Following the assignment, the assignee is the outright owner of the assigned ‘segment’. Any post assignment gain on surrender (encashment) of the segment is taxable on the assignee.
(The insurance industry seems to specialise in the use of confusing terminology.)
Great answers, thank you @jack and @MGB. Particularly pleased to hear Jack’s experience that the life company in-house teams are helpful, since that might be the next port of call in the real case which inspired this question.