Trust fund question

Jp1111

Hello all,

First time postng here, any help would be much appreciated. Also I hope i am posting in the correct section!

Ok, so here is my question/situation....

My wife's nana died and left a trust fund to her four grandchildren (my wife is one) and her two children. The trust fund was split into 10 segments, the grandchildren were entilited to one segment each and the 'adults' 3 segmemts each. The trust fund was set up a little over 10 years ago with £72000. During the time my wife's nana was alive she took an income of £300 per month from the fund, my understanding is that this would of been 5% that is allowed to be taken from the fund each year.

When my wife's nana died the fund was worth £120000 and cashed in for £84000, the difference in the two coming from 10 years of drawing £300 per month from the fund (5% of initial investment). As each grandchild was entilted to one segment (or 10%) my wife received £8400. Now certain family members are instructing and dictating to her she needs to pay income tax on this money. I disagree with this as surely the profit of the fund is classed as a capital gain and therefore the £8400 my wife received falls comfortably within the capital gain tax allowance of £11000?

She has never recieved any documentation about the trust fund from anywhere, she was just asked by a conveyencer to supply her bank details and one day the money arrived in her account. I know details are sketchy but this is all we know, can anybody help and does she have to pay tax?

Many thanks in advance, JP.

Linton

Investment bond gains on closing the bond are taxed as income with basic rate tax already paid rather than as capital gains and the gain includes the 5% drawdown, though in this case it went to Nana. I guess the estate paid the tax due from Nana and that may be some of the difference between the £120000 and £84000.

Tax on investment bonds is rather complex and I guess this complexity is made worse by the use of a trust. Both are beyond my understanding so I will leave the rest to the experts. See here for more information - I have read it but cant answer your question!

Jp1111

Ok thank you for the reply Linton, i will read through the link you posted. Has anyone else any advise?

Thanks all, JP

dunstonh

Now certain family members are instructing and dictating to her she needs to pay income tax on this money. I disagree with this as surely the profit of the fund is classed as a capital gain and therefore the £8400 my wife received falls comfortably within the capital gain tax allowance of £11000?

Capital gains does not apply to the onshore life assurance wrapper.

Was the policy in trust?

if it was not and if it is an onshore bond, then on surrender the gain would be added to her income in the year of surrender. If she was a basic rate taxpayer or lower, then the gain could have top slicing relief applied. The gain would factor in past withdrawals if they do not create an earlier chargeable gain. So, £30,000 plus £12,000 (obviously rough and ready figures) giving a gain of £42,000. It has been running for 10 years. So, that gain can be divided by 10 meaning a top slice of £4200 would be added to her income. If that £4200 did not take her into higher rate tax then there is no further tax to pay.

If it was an offshore bond then there would be tax to pay as they have no tax at source but it is paid on surrender.

She has never recieved any documentation about the trust fund from anywhere, she was just asked by a conveyencer to supply her bank details and one day the money arrived in her account.

Why did the conveyencor surrender it? Assigning the policies to the beneficiaries was an option and if they surrendered it, the tax calculation would be based on them. That may have been a better solution (or not depending on their tax status).

Jp1111

Thank you dunstonh, will try and find some more info and come back to the forum

Thanks again

Jp1111

Dunstonh thankyou for your previous reply. The only extra information i have now found out is that it was an offshore bond held with Skandia. We are not sure why a conveyencer surrendered it, my wife was told very little.

My wife is a basic rate tax payer so have i understood your post correct that she will have to pay basic rate tax on the £8400 (as it was an offshore bond)?

Thanks again, any advise appreciated.

JP

xylophone

https://www.oldmutualwealth.co.uk/globalassets/documents/literature-library/platform/offshore-collective-investment-bond/sk5340.pdf

This? Is the answer to Q18 relevant?

Where does a "conveyancer" come in?

dunstonh

i have now found out is that it was an offshore bond held with Skandia.

Offshore bonds do not pay tax within them. They are not tax free though. When a chargeable event occurs (such as surrender), it usually leads to a tax bill. HMRC are often sluggish to find these although they usually do in the end.

If it was not in trust then the tax bill falls on the estate and the executor should have declared it and put aside funds to pay for it. Now it falls on the beneficiaries of the estate (and not just those that got the money from the bond but any others as well). There is also the possibility of HMRC fines for late payment. You may have a case against the executor.

If it was in trust (as your early posts suggest) then the policy may have the option to be assigned to the beneficiaries and avoided some or all of the tax. So, questions of why it was done the way it was should be put to the executor. There could be valid reasons. Or it could be lack of knowledge and assuming that any investment should be surrendered.

Jp1111

The bond was definitily placed in trust with two trustees (sorry should of been clearer). When she died the bond was surrendered and then monies were paid directly to the 6 beneficiaries as follows (i assume thats where a conveyencer came in?):

My wife and three other grandchildren - 1 segment/10% each (40% of the total bond)

Nana's two children (my wife's dad and auntie) - 3 segments/30% each (60% of the total bond).

So the bond was cashed in for £84000 but would of been worth £120000 had nana not taken a monthly drawdown, im guessing this means a gain of £48000. Would my wife now need to be paying a proportional amount of tax (relevant to the 10% she received from the surrender value) on that gain?

Sorry details are rough and sketchy but it seems next to impossible to get hard information from those involved so im picking up where i can! Apologies if im repeating myself it just seems a minefield and lots to understand!

Thank you, JP

emilyrambal

I just want to ask you all Why Would I, or Other Investors, Consider Using a Trust Fund?

xylophone

The bond was definitily placed in trust with two trustees (sorry should of been clearer). When she died the bond was surrendered and then monies were paid directly to the 6 beneficiaries as follows (i assume thats where a conveyencer came in?):

https://www.oldmutualwealth.co.uk/globalassets/documents/literature-library/platform/offshore-collective-investment-bond/sk5340.pdf

If the above relates to the investment in question, p 16 Q18

"Where the bond is in trust, we will make the payment to the Trustees."


http://www.pruadviser.co.uk/content/knowledge/technical-centre/taxation_uk_investment_bonds/

may be worth a read re trust taxation?