Collective Investment Bond - Inheritance

thevicarscat

Hi, hoping someone can help me with this as I haven't got a clue! I have received a letter from my lawyer regarding an inheritance following a death of a relative. There is a "Collective Investment Bond" which I was originally advised would be paid out to me at X value (value taken at date of death). The lawyer has since sought advice from an accountant and advised that the bond needs to be transferred to me rather than paid out to avoid a "chargeable event". This is where I get confused - what does this mean? Everything I can find talks about Inheritance Tax (its well under this threshold) and capital gains tax (seems irrelevant). 
I have called the company who deal with the bond and they told me that once the bond is transferred into my own name it will immediately go back into the market and at that point should I wish to withdraw it would be done at that rate (this would be a significant drop as this person passed away right at the beginning of Covid about 2 days before the markets plummeted). 
I am trying to understand if I refuse the bond being transferred does the solicitor arrange for me to be paid the bond amount or would a "chargeable event" apply? If so - how do I calculate the value or this to understand what I am best to do?
Hope that all makes sense and that someone can help explain this to me !

Albermarle

this would be a significant drop as this person passed away right at the beginning of Covid about 2 days before the markets plummeted). 

It depends on the investment. Many are back to where they were pre covid . In any case nothing you can do about the timing .

dunstonh

I have received a letter from my lawyer regarding an inheritance following a death of a relative.

Just checking if you are resident in the UK as "lawyer" is term not as well used in the UK as other countries.  Usually if a solicitor is handling an estate then they are referred to as a solicitor.   The relevance of this is the tax position of investment bonds varies by country.

needs to be transferred to me rather than paid out to avoid a "chargeable event". This is where I get confused - what does this mean?

It means that the policy is assigned to you as the new owner and any future taxable events will be under your taxation.

Everything I can find talks about Inheritance Tax (its well under this threshold) and capital gains tax (seems irrelevant).

There is no CGT on invetment bonds.  They are linked to income tax tax.

I have called the company who deal with the bond and they told me that once the bond is transferred into my own name it will immediately go back into the market and at that point should I wish to withdraw it would be done at that rate (this would be a significant drop as this person passed away right at the beginning of Covid about 2 days before the markets plummeted).

That does not seem to be correct.   Unless the executor has sold the investments to cash within the bond, the funds will still be invested where they were when the previous owner was still alive.

I am trying to understand if I refuse the bond being transferred does the solicitor arrange for me to be paid the bond amount or would a "chargeable event" apply?

If you request the proceeds to be paid to then the executor will surrender the policy and settle any tax bill from the estate.

thevicarscat

Thanks dunstonh 
Apologies - terminology should have said solicitor - I am indeed in the UK!

The estate is being split 4 ways - the other 3 beneficiaries have accepted the bond being transferred to them. If I request my share be surrendered and paid out are there tax implications for me? How would I calculate roughly how much this would impact the amount? I'm trying to work out in basic terms whether to request this is surrendered or allow it to be transferred. Thanks

HappyHarry

If the bond is surrendered by the trust, then the trust will pay income tax on any gain and you will receive the net proceeds.

The income tax rate of the trust is likely to be 20% of the first £1,000 of gain and 45% on any gain above that. 

If the bond is transferred to you, and you surrender it, you will pay income tax at your marginal rate on any gain the bond has made.

To make a decision, you really need to know the gain on your share of the bond, and then calculate the most tax-efficient way to surrender it. 

It is likely that the most tax-efficient way will be to transfer the bond to yourself and then surrender it.

*edited typo

thevicarscat

HappyHarry said:

If the bond is surrendered by the trust, then the trust will pay income tax on any gain and you will receive the net proceeds.

The income tax rate of the trust is likely to be 20% of the first £1,000 of gain and 45% on any gain above that. 

If the bond is transferred to you, and you surrender it, you will pay income tax at your marginal rate on any gain the bond has made.

To make a decision, you really need to know the gain on your share of the bond, and then calculate the most tax-efficient way to surrender it. 

It is likely that the most tax-efficient way will be to transfer the bond to yourself and then surrender it.

*edited typo

Thanks - and to ask an extremely daft question - is the gain simply the amount the bond has made since the original investment or is it more complicated than that?
For example - You invest £10k, you die and at time of death the investment is worth £12k meaning £2k gain. The beneficiary would need to pay 20% on the first £1k and 40% on the second £1k?
I really am clueless with this terminology so please be kind if this is a ridiculous question.

HappyHarry

Yes, it's that simple. Just be aware that withdrawals can affect the gain.

e.g. £10,000 initial investment, £1,000 in withdrawals, current value of £12,000 would imply a taxable gain of £3,000.

The bond provider should be able to provide the executor with a figure for that gain.

thevicarscat

HappyHarry said:

Yes, it's that simple. Just be aware that withdrawals can affect the gain.

e.g. £10,000 initial investment, £1,000 in withdrawals, current value of £12,000 would imply a taxable gain of £3,000.

The bond provider should be able to provide the executor with a figure for that gain.

brilliant, thanks so much - it finally makes sense :-)