Tax treatment of Investment Bonds

A beneficiary of an 18-25 trust becomes absolutely entitled at age 21. It the trustees appoint an investment bond to the beneficiary does this avoid all tax charges on the trustees.

Andy Cook

Assumes a UK bond: The trustees can appoint segments of the bond or the whole bond to the beneficiary and taxation then falls upon the beneficiary when the bond/segment is surrendered/encashed. If a basic rate taxpayer then unless top sliced gains trigger higher rate tax then no tax to pay by the beneficiary. The trust has no tax to pay.

John Cartlidge
Campion Solicitors

Thank you for your quick response.

Just to clarify matters from the trust’s perspective:

It is a UK bond
Capital gains tax does not apply
No income tax liability arises on the assignment
What about an inheritance tax exit charge?

Does that affect your original answer?

Andy Cook

Hi Andy

Yes the transfer of value by the Trust would still be liable to an exit charge, based on the value of the bond at the date of transfer. As Tiggers said, there is no income tax charge as a chargeable event hasn’t occurred. The exit charge will be apportioned to only account for the quarters since the beneficiary turned 18.

Claire Spinks
British Taxpayers

No doubt John will respond.

The appointment by the trustees to a beneficiary precipitates no chargeable event gain assuming no consideration.

Any liability to income tax (in your case higher/additional rates only) then arises on the part of the beneficiary on encashment/surrender.

CGT is inapplicable.

An IHT exit charge applies (IHTA 1984 s.71F).

Malcolm Finney

Capital gains tax does not apply?
Life bonds are treated under Income Tax regime.

No income tax liability arises on the assignment?
Not upon the trust, but potentially upon the assignee on encashment/surrender. The encashment or death of the last life assured is the chargeable event for Income Tax purposes.

What about an inheritance tax exit charge?
Double check elsewhere but I believe not provided it is not ‘for money or money’s worth’. IHT helpline should be able to help.

John Cartlidge
Campion Solicitors