Tax on Investment Bond held in Trust

Beaumaris49

About 10 years ago my dad who is now in his 90s took out a discretionary trust (I think they called it a ‘Protected Property Trust’) with a firm of solicitors, with the long-term intention that by assigning his house into the trust, it would prevent the property from being sold at a later date to pay for care home costs.  This has in fact worked well for him.

In addition to the house, a year or so later he also placed in the trust an existing Investment Bond which he had taken out previously.  It has not performed particularly well so after discussing things between the family, he arranged for the firm of solicitors, who along with himself act as trustees, to surrender the bond in full.  The proceeds were paid to the trust and a Chargeable Event Certificate issued to the trustees. The profit came to only around £1500.

The trustees’ accountant is now telling us that as the proceeds have gone into the trust and will not form part of my dad's estate on death, they plan to include this in the Trust Return and pay the tax (around £125).  They say that when dad dies and payments are made from the trust to the beneficiaries (my sister and I), they will provide us with R185s and if we are non/basic rate taxpayers we would be able to reclaim some or all of the tax paid by the trust.

Everything I have read seems to contradict this.  I believe that as the sole Settlor who is still alive and a UK resident, any gain should be assessed against my dad for income tax.  As his total income is only around £20k a year, the gain on the bond should be free from any more tax.  The trust would only be liable to pay any tax if my father was either dead or not a UK resident at the time of the chargeable event, according to the information I can find online.

Who is right?  If the trustees insist on paying tax on the gain can my dad reclaim it?  If so how would he do this?  I don’t think he’s had to complete a tax return for 30+ years.  I want to be sure of the facts before I get back in touch with the accountant so any guidance gratefully received.

 

 

  

 

Jeremy535897

I think you are right. See for example:
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem3210

More detail at:
https://www.gov.uk/government/publications/gains-on-uk-life-insurance-policies-hs320-self-assessment-helpsheet/hs320-gains-on-uk-life-insurance-policies-2022

You don't "take out" a discretionary trust. You create one. If your father continued to live in the house rent free after creating it, then there is a gift with reservation, and no inheritance tax is saved (but the capital gains tax free uplift on death is lost).

The gift to the trust would also be likely to fall foul of the deprivation of assets rules regarding the payment of care home fees.

Keep_pedalling

Jeremy535897 said:

I think you are right. See for example:
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem3210

More detail at:
https://www.gov.uk/government/publications/gains-on-uk-life-insurance-policies-hs320-self-assessment-helpsheet/hs320-gains-on-uk-life-insurance-policies-2022

You don't "take out" a discretionary trust. You create one. If your father continued to live in the house rent free after creating it, then there is a gift with reservation, and no inheritance tax is saved (but the capital gains tax free uplift on death is lost).

The gift to the trust would also be likely to fall foul of the deprivation of assets rules regarding the payment of care home fees.

In addition his residential nil rate band will also be lost as he put his home into trust before that was introduced.

Are these trustees the same people who charged him an arm and a leg for setting it up and failed to mention either gift with reservation or deliberate deprivation of assets? Any switched on LA will challenge the shift of assets if he does need care.