Taxtion of Investment Bonds

We have a UK Resident Accumulation & Maintenance Trust created with a cash gift by a UK resident individual. The beneficiaries are minors and do not have any entitlement.

The trustees invested in 2 onshore bonds which they wish to encash and the tax treatment has to be ascertained. Research would suggest that:-

  1. Provided that the settlor is alive and UK resident in the tax year in which the gains occur, then they will be assessed on the settlor as an individual. The calculation follows the normal rules for individuals with top slicing relief available where applicable. The settlor can reclaim the tax from the trustees; or

  2. If the settlor died in the tax year prior to encashment then the trustees will become liable. No top slicing relief would be available.

The first scenario seems most odd, as it can be up to 20 years before a bond is encashed, whereas the cash gift only remains a PET for 7 years.

Comments would be most welcome.

Andrew Magilton

It may seem odd but is correct. A common route to mitigate this would be an assignment of a bond to a non-taxpaying beneficiary for them to encash the bond personally. This doesn’t seem to be an option in this case.

Ian Smart
Royal London

Yes your suggested taxation treatment is correct. You seem to be comparing apples and pears - the IHT treatment of something does not necessarily follow through for other taxes e.g. Deeds of Variation income tax v IHT & CGT. Why do the trustees now wish to encash them, is it to raise cash for discretionary distributions or simply to reinvest in other investments? If the former and the bonds are segmented, the trustees may wish to consider assigning some of the segments to the minor beneficiaries as a discretionary distribution in-specie. This is not a chargeable event gain for income tax. Those minors could then encash the segments personally and assuming they have no other significant income, any tax would be covered by the notional 20% tax credit, with no tax cost to the trustees or settlor.

The cash gift would only have been a PET if the A&M trust had been created before the rules changed in 2006, now it would be a LCT. We have examples where the A&M trust investment bonds have still not been encashed after 30+ years.

Maxine Higgins
Citroen Wells

Trust rate (45%) applicable to event gains.

Malcolm Finney

Hi Joanne,

Chargeable gains are assessed on the settlor, provided they are UK resident. Normal top-slicing rules would apply. The bond is deemed to have paid 20% tax so the rule of thumb is if you’re not made a higher rate tax payer on encashment then no tax payable.

Normal taxable income + gain is less than £50,000 2019/20 no liability.

For the above reason the settlor ought to ‘assign’ segments of the bond, this does not trigger a ‘chargeable event’, must be over 18. In essence can the bond be assigned to those who’s segments on encashment keeps them in basic rate.

Richard Bishop