I am dealing with the tax for a discretionary trust who received the proceeds from a life assurance policy written in to trust on death.
From my understanding of these types of bonds the policy ends on the death of the final life assured and the cash proceeds paid to the trustees. The gain arising on this is taxed on the deceased tax return to date of death.
The problem I have is that the death of the life assured was in 2002 and estate not administered until recently due to the family not knowing about these bonds, therefore there has been growth in the policy of ÂŁ150k from date of death the date the proceeds finally received.
The bond provider has issued a chargeable event gain certificate on the original gain in 2002.
Has any one come across this before and know whether the growth between date of death, to date the bond was cashed is taxable? I have researched this and only thing I have found is on Aberdeenâs technical page saying that it isnât. However, given the significant increase in value want to make sure this is correct.
As Richard says the most likely treatment is a capital gain. It seems likely that the legal position (subject to the actual contract) was that, on the death of the last life assured to die, a chargeable event gain arose taxable on the settlor/trustees, depending on whether the settlor was alive and if not when he/she died. From that date the insurer surely must have held the monies due on trust for the owner of the policy, the trustees. These seem to have comprised the investments underlying the policy which no doubt the insurer managed conservatively, or better as it appears, like a good trustee. The insurer is entitled not to pay out without a valid claim.
But watch out for some HMRC self-serving nonsense in IPTM7390. There is no way in the world that the appreciation in value can be taxable as interest. There is no relationship of debtor and creditor. There is instead equitable accounting. The legal remedy is not to sue to recover a debt but to claim the trust fund. There is only interest if the contract specifically provides for it on the policy proceeds due from the time of death. You would expect that to have been an alternative rather than an apparent concession that the fruits of investing them be handed over when claimed.
The relationship between a policyholder (or his or her successors) and insurance company would only in very rare circumstances be that of trustee/beneficiary. There will (or should be) a provision in the policy for what happens on the notification of the death of the last life assured. Usually that will involve the funds being transferred to a fairly conservative fund until a claim can be settled. So itâs normally a contractual relationship.
Also, just for clarity, any gains are not subject to CGT, but to income tax. The nomenclature in this area is a bit confusing referring to âgainsâ etc.
An income tax charge under the chargeable event gain provisions will have arisen on the date of the chargeable event (CE) ie the last life assuredâs death in 2002.
The person responsible for any income tax charge arising will be the âsettlorâ assuming he/she was alive when the CE occurred or, otherwise, the trustees.
Any CE certificate issued by the insurer will relate to the chargeable event gain arising in 2002 (not any later date when proceeds may be paid out).
I note Robert Surridgeâs comment re trustees/beneficiaries but it would seem that pending lodgement of a claim on the insurer following the last assuredâs death by the trustees any increase in the amount actually paid out would have, in the interim, been held by the insurer on trust for the trustees (ie policyholder); unless the policy has any specific provision as to how such âextraâ income is to be taxed/treated. Prima facie, such âextraâ income will be subject to income tax on the part of the trustees (for whom the monies were held).
âInterestâ always seems to raise tax issues with HMRC but short of explicit provision in the contract any âextraâ monies would not seem to satisfy what typically constitutes âinterestâ for income tax purposes.
âThere is no tax due on the estate for any investment growth between the date of death and the date the bond provider receives notification the life assured has diedâ.
From Standard Life.
In the case above the ÂŁ150k gain (capital gain - increase in unit value or dividends reinvested) based on my understanding of the rules ought to be distributed without tax. Interest (from cash elements of the investment) is payable at 20%.
Weâd assume assignment is an option in this case.
Iâts not my experince investments are moved to cautious investments or cash on notification of death.
My thoughts are HMRC may question this outcome and may then default to tax the gain as CGT on the estate. Based on the issue of a clear tax advantage here.
Im not suggesting CGT is in scope on the bond - they are taxed as income overall.
The bond has never been held as part of anyoneâs estate as it was settled on a DT ab initio I assume.
The proceeds of the policy arising death belong to the DT trustees.
It is too late to effect an assignment of the bond; the chargeable event gain has already occurred. Assignment would be common if prior to, say, encashment the DT trustees appointed the bond out to the DTâs beneficiaries (or if the bond was to be encashed by PRs or estate beneficiaries post death).
Interest is payable for the use of money over time. HMRCâs intellectual dishonesty leads them to assert that any transaction which results in a person receiving more than he laid out or is due is taxable as interest. The fact that they do not genuinely believe this is that they obtained special treatment for deeply discounted securities and loan relationships for CT based on debits and credits rather than traditional lending concepts of capital and income.