chargeable events on inherited bonds

marrioa

Hi

I have inherited a large amount of "money" in stocks and shares ISA and an investment bond with the joint lives assured of my sister (who lives in the USA) and me.

The wealth management team are concerned about transferring them as each time it is a chargeable event and there are tax implications.

Please could someone outline some of the choices I have and suggest a way forward.

I am meeting the named person representing the company next week, and would like some basics before then. Any help would be hugely appreciated.

Thank you

xylophone

Is this relevant?

http://www.thepfs.org/knowledge/technical-articles/articles/single-premium-investment-bonds-the-valuation-of-death-benefits-for-chargeable-event-and-inheritance-tax-purposes/42282

Finally, the owner of the Bond will not always be the life assured or only life assured under the Bond so on the death of the owner a chargeable event will not always occur as the Bond will continue in force if there is at least one remaining life assured. In this situation the IHT value in the estate of the deceased owner will be the market value of the Bond immediately before the owner's death.

With regard to the ISA, the deceased was not your spouse?

When did you inherit under a will/intestacy?

dunstonh

The wealth management team are concerned about transferring them as each time it is a chargeable event and there are tax implications.

Investment bonds cannot be transferred. Ownership can be assigned. An assignment does not trigger a chargeable gain in all cases. (such as when its a gift). If its exchanged for moneys worth then it a gain.

The death of the bond owner does not trigger a chargeable event where the lives assured are still surviving. Assignment to the beneficiary would not trigger a chargeable event.

Variations can occur depending on how it was set up and if in trust and type of trust.

The wealth management team

What is this wealth management team? They appear to not understand the tax wrapper. In the UK, companies that refer to themselves as wealth companies are usually restricted in ability and understanding. That is why they are not using more conventional titles that indicate their status.

I am meeting the named person representing the company next week

What company? The investment bond provider or someone else?


Is it an onshore bond or an offshore bond?
was it trust (what type of trust if it was and who were the beneficiaries)?
you mention the lives assured. Who are the owners?
Was it written on first life or last life basis?

marrioa

Thank you for your replies, Dunstonh and xylophone.

The wealth management team is St James's Place and their their partner is at Burton Hills wealth management.

The ISA has been transferred into a Unit Trust Account.

The investment bond is split into several funds and asset classes:

Global managed/international equity/worldwide managed/schroder managed/AXA Franlington managed/global equity.

The ISA : global class L UT/Intl Equity class L UT/ Worldwide Opps class L UT/ mgd growth class L UT/ strategic mgd class L UT/global equity class L UT/balance mgd class L UT.

The owner was my step dad and I am the sole beneficiary with a separate amount going to my sister. There was no IHT to pay.

The death benefit is on the death of the second to die of the lives assured.

As of November 2017 the collective bond was worth £52k and the ISA £21k.

I also inherited his house which needs major work and I hoped to use some of the money to do the work.

Thank you again

dunstonh

The wealth management team is St James's Place and their their partner is at Burton Hills wealth management.

Sales reps then. That perhaps explains their lack of knowledge. Good at selling the stuff. Not so good at servicing it.

Whatever you do, don't use SJP for your own stuff. Very flash and slick but restricted and very very expensive.

The investment bond is split into several funds and asset classes:

Funds are irrelevant for what you are sorting out. There is no direct taxation on the funds.

The owner was my step dad and I am the sole beneficiary with a separate amount going to my sister. There was no IHT to pay.

You mention you and your sister were the lives assured. Was this bond in trust (as that is the only way to name a beneficiary).

The death benefit is on the death of the second to die of the lives assured.

Subject to any trusts set up, there should be no tax to pay as assignment doesn't trigger a chargeable event where the lives assured are still alive. Once assigned to you, surrender would create a chargeable event and would be measured against you.

The ISA can be sold by the executor and passed to you as cash. The only tax it is measured under is IHT.

Aegis

Cases like this often make me wince a little, as it often looks like there was little to no justification for picking an investment bond. In this case, the bond will almost certainly cause you to pay more in tax overall than not using a bond in the first place (c. 20% minimum on the gains rather than a blend of 0%, 10% and 7.5% on the capital gains and income tax, assuming your stepfather was a basic rate taxpayer in retirement).

Given the level of assets your stepfather held, it's difficult to see why an investment bond would have been a good idea, as these were historically better than direct portfolios once an individual had about £250,000 of non-ISA investment assets, a figure which has since risen substantially due to the reduction in capital gains tax. The only legitimate reason I can think of for him having one is if he was concerned that he might go into care and wanted to shelter the money from means testing, but this is a secondary benefit and probably not the deciding factor. If he was investing via a trust, that might be another matter.

The questions I'd be asking at your meeting would be:

• Why was my stepfather invested in an investment bond?
• How much tax has been paid already within the bond?
• What is my tax liability on surrender?

dunstonh

Cases like this often make me wince a little, as it often looks like there was little to no justification for picking an investment bond.

I must admit when I saw £52k as the value, my first thought was "what the heck is it doing in an investment bond". Of course, it may be a very old one going back to the days of age allowance reductions etc or there have already been surrenders but certainly today (and for a good number of years now) it would be hard to see what justification there was for having it.

Aegis

dunstonh wrote: »

I must admit when I saw £52k as the value, my first thought was "what the heck is it doing in an investment bond". Of course, it may be a very old one going back to the days of age allowance reductions etc or there have already been surrenders but certainly today (and for a good number of years now) it would be hard to see what justification there was for having it.

That would probably be giving the benefit of the doubt, yes, but I've seen a couple of clients recently who were persuaded to go into SJP bonds, and I've seen little to no rationale for the bond over a direct portfolio of unit trusts.

My suspicion is that it's because it's harder to shift the assets when they're in an SJP bond, so SJP pay their advisers more for bonds than unit trusts. I can't confirm that because they don't seem to disclose the internal commissions in their recommendations.

marrioa

Thank you so much, Dunstonh and Aegis.

The investments were both purchased in 2011. There is no mention of trusts on the schedules and both have my sister and me as lives assured. the will left everything to me, with a cash sum for my sister and there was no separate mention of the investments. Apparently there was no tax payable while my step dad was alive.

I have been informed by the partner that "tax is complicated" and he wanted to know how much I needed, what for, and provide him with estimates for the work. This is why I am seeking guidance from you, as I have had unit trusts myself through HL and nothing was "complicated". I was left with the feeling that he did not want me to surrender the investments, which made me more determined to do so, even if it means moving it to someone with a more transparent way of working.

From what I can see, the initial charge was %5 and the annual management charge up to 2.5% but their Key Facts brochure only talks about unit trusts.