Our client wishes to surrender his investment bond and have the trust pay the tax. The gains would amount to £230,000 and the tax at 45% would be £103,500. However it is an Onshore bond (domiciled in the UK). Does that mean that it comes with a 20% tax credit and therefore only 25% tax needs to be paid by the trust? (ie £57,500 ?)
Hi Peter,
On full encashment of the bond, typically the chargeable event gain is added to your clients other income to determine the amount of income tax that may be payable.
Your client may be able to benefit from top-slicing relief, if applicable.
Im not aware of the option you refer to in terms of the trust paying the tax.
Riçhard C. Bishop
PFEP
Hi Richard
Thanks for your response. The bond is currently worth 330k with 230k capital gain dating back 24 years. The Trustees don’t want to distribute yet to the beneficiaries but do want to cash in the bond due to the high market value. Ie it not the case that the Trust will pay income tax on the chargeable gain at 25% in the current tax year such that when the income is eventually distributed to the beneficiaries it comes with a 45% tax credit that the beneficiaries may take advantage of?
See ITTOIA 2005, 465
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Where an investment bond is held in a discretionary trust the tax charge arising on a surrender falls
on the settlor (assuming the settlor is alive and UK resident as seems to be the case with this query). (IPTM3220)
The settlor may recover the tax from the trustees. (IPTM3220)
As this is a UK bond income tax at the basic rate is treated as paid and liability is due at the difference between
basic and higher (or additional where relevant) rates only. (IPTM3110)
Depending on personal circumstances the settlor may qualify for various reliefs.
There is no tax credit attaching to distributions of the surrender proceeds to beneficiaries.
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If the “creator” (ie settlor) of the trust is alive at the date of the chargeable event (ie surrender) and is presumably resident in the UK any income tax charge arising is his. The 45% trust rate is inapplicable.
The charge on the creator could possibly be mitigated if the bond was appointed out to the beneficiaries prior to surrender.
Any charge on the creator is recoverable by him from the trustees.
As an onshore bond a tax credit of 20% is available to the individual charged.
Malcolm Finney
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Why is the a high surrender value a problem? Is it because the trustees want to lock in the gains made so far. If so, there may be fund switching options which would be more suitable than a surrender.
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Hi Malcolm, I just wanted to thank you for your comment and to ask you another question related to this: the Discretionary Trust has made a partial surrender of the Investment Bond yielding a £50,000 CEG (and therefore basic rate tax treated as paid by the Settlor £10,000). The remaining tax payable on the £50,000 CEG including TSR is £8,000. If the Settlor has the statutory right to reclaim the tax payable from the Trust, does he claim the remaining tax payable £8,000 or the total tax that he nominally would have paid £18,000? (Settlor is alive and UK resident, we talk about an onshore bond, and Trust just past the 10 year anniversary)
ITTOIA s. 538 specifies that the amount recoverable from the trustees is “the income tax for which the individual is liable for the tax year, after any relief available in respect of the gain under section 535 (top slicing relief)”.
Many thanks: So do I understand correctly that based on ITTOIA 2005 s.538, the amount the settlor can recover from the trustees is the excess income tax attributable to the chargeable event gain (CEG), after applying any top slicing relief (TSR) available to the settlor. The recoverable amount specifically excludes the basic rate tax credit that is treated as already paid within the structure of an onshore bond. Therefore only £8,000 would be recoverable.
Yes.
The logic is that he can only recover what he has actually paid in tax.
If he fails to claim he will have made a chargeable lifetime transfer of £8,000.
Perfect! Thanks! That makes absolute sense to me having re-read ITTOIA 2005 s.538. All good now!