A dies owning an investment bond, but the life assured is her former husband (still alive) B. It appears that B assigned the bond to A after their divorce
The bond is surrendered and the chargeable event certificate is addressed to A, and shows A as the bond owner.
I believe no income tax is due from the executor of A, as basic rate tax is deemed to have been paid.
The whole estate is in held on a discretionary trust.
Do the bond proceeds pass to the Trust as income, carrying a tax credit, so that the trustees have to pay a further 25% income tax, or do the proceeds pass as capital, and are not taxable in the hands of the Trustees?
the proceeds are not income - they are merely taxed at income tax rates, in a similar way to when 5% annual withdrawals are often referred to as tax-free income when they are actually capital, so I believe they should be treated as capital.
The legislation on single premium policies (including stuff still contained in ICTA 1988!) is to say the least difficult to understand. My view is as follows:
\A, following the assignment of the bond, became the beneficial owner with B being the life assured under the bond ie beneficial owner of the bond is not the life insured. Any chargeable event gain certificate is issued to the “appropriate policyholder” [ICTA 1988 s552(1) and (10)(b)], in this case that would seem to be A’s PRs (the event being the surrender).
On A’s death, the bond would pass to A’s PRs and if not surrendered would become settled on the DT. Any surrender would then be by the trustees.
Any trust set up in a will is validly constituted from the date of death and it may be that the PRs may also be trustees in which case it becomes necessary to ascertain whether the surrender is that of the PRs qua PRs or PRs acting as trustees.
It may therefore be that the PRs surrendered the bond qua PRs (ie during the administration period) giving rise to a chargeable event gain with any income being that of the estate and income tax thereon being a liability of the PRs. If the bond is a UK bond no income tax charge arises on the PRs. On distribution of the proceeds arising from the surrender to the trustees the latter are then liable on the income/proceeds with an offsetting 20% basic rate tax credit.
Alternatively, the PRs qua trustees could surrender the bond. The surrender in this case would be by the trustees (not PRs). However, the chargeable event gain would then be subject to income tax on either the trustees or A (as pre death income) depending upon whether the surrender was in a tax year after the tax year of A’s death or in the same tax year respectively.
Thanks Malcolm-this concurs with my view, but with which the accountant disagreed. It has also been confirmed in a separate post on Accounting Web.
The surrender was by the PRs as PRs. No advice was taken on income tax consequences.
The bond proceeds appropriated to the Trust are capital for trust and iht purposes, but subject to a 25 % income tax charge on the gain, with credit given against the 45% rate for the 20% treated as paid by the insurance company.
I believe that only the 25% income tax paid by the trustees goes into the tax pool, and that, when the trust fund is distributed, this can only frank actual income, of which there is none apart from a little interest, which has tax applying to it in the tax pool already. The proceeds of the policy are capital, so will not carry with it on distribution any part of the tax pool. This means the beneficiaries cannot recover the 25% income tax paid on the policy proceeds.
ITA 2007 s 498 makes it clear that the notional 20% tax credit does not fall into the trust’s tax pool; thus, only 25% (ie 45% less 20%) falls therein.
As the bond’s proceeds are capital, on distribution the 25% tax payment is not available to frank it and no part is recoverable by the beneficiary recipient.
A 45% income tax charge would fall into the tax pool had the bond been an offshore bond.