Investment bond, trusts and CGT

Weaven505

Any thoughts on this issue would be greatly appreciated.

My father took out an investment bond he bought for my daughter.  He put this in trust.  There are three trustees: my father, myself and my wife.  My father is still alive.  My daughter in now an adult. I would like to cash in this investment bond and give her the money to put in an ISA in her own name.  The value is below the annual ISA threshold.

The capital gain liability is probably about £9K.  

How do I withdraw the value without paying any tax?  Can I claim that the withdrawn amount is equally shared between the three trustees, who each have a £3K CGT allowance?  It would then be acceptable for each trustee to gift their amount to the daughter?

I could add the daughter as a further trustee, but to avoid CGT we would still need to use multiple allowances.

A source of further confusion, for me at least, is that this investment is linked to a life assured.  I am told it is worth very slightly more when my father passes. I havent understood the connection between a life insurance policy and the investment bond, but I don't think it matters.

Thanks.

Linton

What sort of investment bonds?  Onshore investment bonds (these do have a very small life assurance component)  are taxed through income tax, not CGT. Are you sure about CGT?

I know about how investment bonds are taxed (the rules are rather different to taxation of normal income) but not the implications of them being held by a trust so wont explain further at this stage

poseidon1

Weaven505 said:

Any thoughts on this issue would be greatly appreciated.

My father took out an investment bond he bought for my daughter.  He put this in trust.  There are three trustees: my father, myself and my wife.  My father is still alive.  My daughter in now an adult. I would like to cash in this investment bond and give her the money to put in an ISA in her own name.  The value is below the annual ISA threshold.

The capital gain liability is probably about £9K.  

How do I withdraw the value without paying any tax?  Can I claim that the withdrawn amount is equally shared between the three trustees, who each have a £3K CGT allowance?  It would then be acceptable for each trustee to gift their amount to the daughter?

I could add the daughter as a further trustee, but to avoid CGT we would still need to use multiple allowances.

A source of further confusion, for me at least, is that this investment is linked to a life assured.  I am told it is worth very slightly more when my father passes. I havent understood the connection between a life insurance policy and the investment bond, but I don't think it matters.

Thanks.

A few assumptions:

* The bond is a UK single premium policy, where the underlying funds have suffered UK tax during its exsistence ( ie it is not an offshore bond)

* The bond trust has been running less than 20 years and there have no withdrawals in that time.

* Your daughter is either a zero rate income tax payer or at worse comfortably within the 20% band.

The link below provides an overview of the taxation of investment bonds held in trust.

https://techzone.abrdn.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust

Key point you should note is that investment bond gains are liable to income tax ( not CGT ) so cgt exemptions wholly irrelevant.

Assuming your daughter is a lower or zero rate tax payer, and all the other assumptions mentioned above hold true, the most effective way to avoid paying income tax on the entire gain, is to break the trust in your daughters favour and assign the bond into her personal ownership. She can then cash in  the bond and as a zero or basic rate tax payer the entire £9k is deemed to have paid 20% income tax at source so your daughter will have no further liability.

If you click on the 'assigning to beneficiaries ' section of the link above there is further explanation.

Finally I assume the amount originally gifted to the trust was relatively modest, so that there is no question of IHT arising at its commencement or termination in your daughters favour.

Weaven505

Thanks for the above advice.  The investment bond is called "Aviva Life Distribution AL/PSB".  I want to put the money in an ISA so I have better control over charges etc.  So the bond is not offshore. It was started in June 2005, so nearly 20 years. No Witrhdrawals. My daughter is a student so not paying income tax.  Now that it has been explained that it is treated as income not capital gains I can understand that the best way forward to assign the daughter as the beneficiary and to settle it in her favour.  Thanks again.   

poseidon1

Weaven505 said:

Thanks for the above advice.  The investment bond is called "Aviva Life Distribution AL/PSB".  I want to put the money in an ISA so I have better control over charges etc.  So the bond is not offshore. It was started in June 2005, so nearly 20 years. No Witrhdrawals. My daughter is a student so not paying income tax.  Now that it has been explained that it is treated as income not capital gains I can understand that the best way forward to assign the daughter as the beneficiary and to settle it in her favour.  Thanks again.   

I am sure Aviva can supply the relevant trust deed of assignment to achieve the termination of trust and transfer of bond ownership.