Taxation on Investment Bonds held in trust

taxistaxing

Hi All,

I'm trying to understand the best course of action for family wealth planning.

There's four investment bonds held in trust (I'm unsure if this is an absolute or discretionary trust).
Set up a long time ago by my mother who is thankfully still with us and in good health.

Trustees:
Mother and Sister
Beneficiaries:
Me and Sister

If we were to cash in or surrender these bonds, my understanding is we can mitigate the tax liability on any gains with Top Slicing Relief (TSR). However, most google searches state that a Trustee isn't eligible for TSR. So does this mean I would be able to benefit from it but my sister can't? If that is the case, is there anything we can do so she is in a better position to reduce her tax liability?

Thanks in advance for any help!!

Jeremy535897

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

poseidon1

taxistaxing said:

Hi All,

I'm trying to understand the best course of action for family wealth planning.

There's four investment bonds held in trust (I'm unsure if this is an absolute or discretionary trust).
Set up a long time ago by my mother who is thankfully still with us and in good health.

Trustees:
Mother and Sister
Beneficiaries:
Me and Sister

If we were to cash in or surrender these bonds, my understanding is we can mitigate the tax liability on any gains with Top Slicing Relief (TSR). However, most google searches state that a Trustee isn't eligible for TSR. So does this mean I would be able to benefit from it but my sister can't? If that is the case, is there anything we can do so she is in a better position to reduce her tax liability?

Thanks in advance for any help!!

Reading the link provided by Jeremy535897 is certainly reccomended.

However to summarise:

1) If the bonds are surrendered during your mother's lifetime, any chargeable event gain will  potentially  be assessable on her in her capacity as the original settlor of the trust fund. Her trusteeship does not prevent top slicing relief being utilised on her behalf. This is also the case despite her not being a beneficiary of the trust.

2) If your mother's other income sources are such that even with top slicing relief, higher rate income tax would be due, there is the alternative of terminating the trust and 'appointing' (transferring) equal shares in the bond to you and your sister to hold personally. You both can then encash the bonds and rely on top slicing relief to potentially avoid  income tax on accumulated bond gains depending on your respective income positions. You could even partially encash over different tax years, if that would  assist in keeping tax bills to a minimum.

Please note if option 2) seems appropriate, the trust will need to be terminated via a deed of appointment signed off by the trustees. The trustees should approach the bond trust provider to see if they have a proforma document the trustees could use for that purpose. A copy of the executed deed is then provided to the bond company to support the assignment of bond units to you and sister.

Word of warning however, there is a possibility that after  such a long passage of time the bond company may longer provide such documentation. See below link to another thread dealing with bonds in trust where a 'work around' was suggested where the bond company insisted a solicitor draft the appointment deed. It may be possible to utilise another insurance company's documentation if you encounter similar difficulties.

https://forums.moneysavingexpert.com/discussion/6586831/aviva-and-deed-of-assigment#latest

These bond trusts still appear to be out there in abundance, but sadly with little or no guidance to the families on how to navigate the complexities of mitigating/ avoiding chargeable event liabilities on eventual encashment.

taxistaxing

poseidon1 said:

taxistaxing said:

Hi All,

I'm trying to understand the best course of action for family wealth planning.

There's four investment bonds held in trust (I'm unsure if this is an absolute or discretionary trust).
Set up a long time ago by my mother who is thankfully still with us and in good health.

Trustees:
Mother and Sister
Beneficiaries:
Me and Sister

If we were to cash in or surrender these bonds, my understanding is we can mitigate the tax liability on any gains with Top Slicing Relief (TSR). However, most google searches state that a Trustee isn't eligible for TSR. So does this mean I would be able to benefit from it but my sister can't? If that is the case, is there anything we can do so she is in a better position to reduce her tax liability?

Thanks in advance for any help!!

Reading the link provided by Jeremy535897 is certainly reccomended.

However to summarise:

1) If the bonds are surrendered during your mother's lifetime, any chargeable event gain will  potentially  be assessable on her in her capacity as the original settlor of the trust fund. Her trusteeship does not prevent top slicing relief being utilised on her behalf. This is also the case despite her not being a beneficiary of the trust.

2) If your mother's other income sources are such that even with top slicing relief, higher rate income tax would be due, there is the alternative of terminating the trust and 'appointing' (transferring) equal shares in the bond to you and your sister to hold personally. You both can then encash the bonds and rely on top slicing relief to potentially avoid  income tax on accumulated bond gains depending on your respective income positions. You could even partially encash over different tax years, if that would  assist in keeping tax bills to a minimum.

Please note if option 2) seems appropriate, the trust will need to be terminated via a deed of appointment signed off by the trustees. The trustees should approach the bond trust provider to see if they have a proforma document the trustees could use for that purpose. A copy of the executed deed is then provided to the bond company to support the assignment of bond units to you and sister.

Word of warning however, there is a possibility that after  such a long passage of time the bond company may longer provide such documentation. See below link to another thread dealing with bonds in trust where a 'work around' was suggested where the bond company insisted a solicitor draft the appointment deed. It may be possible to utilise another insurance company's documentation if you encounter similar difficulties.

https://forums.moneysavingexpert.com/discussion/6586831/aviva-and-deed-of-assigment#latest

These bond trusts still appear to be out there in abundance, but sadly with little or no guidance to the families on how to navigate the complexities of mitigating/ avoiding chargeable event liabilities on eventual encashment.

Thank you very much for taking your time with such a detailed explanation. It is confusing enough without there being parties holding two roles in proceedings!

taxistaxing

@poseidon1 @Jeremy535897

Thank you both for your replies and help. I now have a bit more information. The bonds were all removed from trust and assigned to my sister so that makes things slightly easier.

She's already a HR taxpayer but has a bit of room before reaching the £100k threshold that starts interfering with PA. In trying to encash them now in the most tax efficient way my understanding is that she will be eligible for TSR.

My two questions I'd like help with please:
* Is TSR ignored from prior tax years? E.g. if she encashed one this year and one next year, the TSR would be calculated as separate, mutually exclusive events? Because in theory when the first one is done, the PSA of £500 has been "used up" as part of the calculation? But this is ignored in the next tax year when the second one is done?

* One of the bonds has a significant gain of a 6 figure amount. Despite being 30 years old, this creates quite a tax liability. I've seen other threads where a suggestion has been to encash this over many tax years to reduce the gain. E.g for simplicity, do £50k one year and £50k the next. However, I believe if someone tried to do this, the moment they claim the first £50k, this resets the remainder as Year Zero? i.e. the remaining £50k would be assessed as having been gained in one year rather than thirty if encashed the following year. Is that correct? 

Again, any info or advice offered would be greatly appreciated! 

Thanks,

taxistaxing

Jeremy535897

Assigning the bond to a beneficiary (who is an adult) allows the bond to be cashed in at the beneficiaries’ tax rate. Once the bond (or segments of the bond) is assigned, the beneficiaries are treated as if they have always owned it and top slicing relief for the entire period is available to them.
https://techzone.aberdeenadviser.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust
I am assuming the policies are pre 2013 policies that have not been amended?
For a detailed discussion on TSR, see 
https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/top-slicing-relief/top-slicing-relief-facts
If the policies have not been modified, it does look as if TSR is unavailable on a second or further partial surrender.

poseidon1

See link below to another thread which gave rise to similar issues with regard to timing and nature  of partial bond encashments ( to minimise tax exposure) and  as this relates to the original bond anniversary maturity dates.

https://forums.moneysavingexpert.com/discussion/6595026/top-slicing-advice-partially-surrendered-onshore-bond#latest

As you will see in that thread the OP was seeking to initiate partial bond encashments with a view mitigating his mother's potential  higher rate  tax exposure. Your sister's circumstance differs since she is already a higher rate tax payer, so her concern is to avoid breaching the £100k threshold and progressively losing her PA.

However what struck me in that post was the advice and assistance offered by the life company in identifying the optimum manner to partially encash the bond to limit the gain arising  - in that case encashment of whole bond segments, rather than propotional encashment across all segments was the way to go.

Assuming your sister's life company can be equally helpful, she could request they calculate on a 'what if' basis an optimum gain on encashment of whole bond segments, sufficient to keep her taxable income under the £100k threshold for the current tax year.

Jeremy535897  supplied a  link to M & G's technical briefing note illustrating the complexity inherent in the calculation of bond gains in different scenarios. Notwithstanding any assistance the life company maybe able to provide to your sister, given the magnitude of the bond gains (you mention up to 6 figures) there could be a case for seeking bespoke advice from a Chartered Accountant personal tax adviser.

For example within your sister's personal circumstances does she have children ( as basic rate taxpayers )  in whose favour she could gift bond segments thereby enabling them to fully benefit from top slicing relief to wholly avoid income tax? Such a gift would also assist any IHT exposure her personal estate maybe facing. Similarly, is there a spouse in whose favour a gift of bond segments could be beneficial to mitigate overall income tax exposure between them?

It seems to me your mother's bond trust decision 30 years ago, has achieved a significant IHT saving with regard to her current taxable estate.

 In your sister's case staggering encashment of the bonds over multiple tax years could assist in  mitigating her own personal income tax exposure in years to come, but perhaps she could also consider a degree of generational tax planning with the bonds with the dual aim of IHT planning whilst sheltering the accrued bond gains from the income tax she herself is now exposed to.

taxistaxing

@Jeremy535897 @poseidon1

Thank you both once again for your information and prompt replies.

I think seeking advice is probably the way to go at this point then. I have read and googled just about anything and everything regarding investment bonds and our own circumstances go beyond any articles or examples I have been able to find (multiple bonds over multiple years)! My concern is that someone wouldn't know all the niches and complexities of this situation - we've had different accountants help my mother over the years with conflicting approaches on what should and shouldn't be included in her self assessment tax returns, for example, that has made us a little cynical! And if it ends up being done incorrectly, it is the individual, rather than the professional who is liable!

Neither my sister or myself are married or have children which is partly why this has come up as part of overall financial planning otherwise it would be easier just to pass some or all of these on as you suggested poseidon.

I believe with the below as an example...

Bond 1 gain £20k over 20 years.

Bond 2 gain £20k over 20 years.

Bond 3 gain £20k over 20 years.

Bond 4 gain £150k over 30 years.

The first 3 could be encashed with zero tax liability using TSR over 3 tax years:

£1k slice gain (£20k/20 years), becomes £500 after PSA relief applied. 40% tax of remaining £500 is £200. However, 20% tax already considered paid on the £1k slice (£1k*0.2=£200). So tax neutral.

The final one could be "unwound" over multiple years where £20k gain could be realised in tax year 4 similar to the first 3 bonds, or actually, £34k at this point with the extra years passing, again with no liability.

But this would mean the remaining £116k is assumed to now have a life of zero years? And it will still incur a hefty liability when encashed - even if it was 20 years later...? Unless there were a time where Annual Income was much lower and far more BR threshold could be used up? e.g. retire a year or two earlier than planned and use this rather than draw from pension...

What a mess! Part of me thinks just get rid of everything and incur the liability and be done with it, the other part more greedy! Appreciate it is very much a first world 'problem'.

Jeremy535897

It's not my area of expertise, and I doubt you will find many tax advisers who understand all the nuances. Most of the technical tax expertise lies with the insurance companies.
If your sister was prepared to assign half of Bond 4 to you, that would reduce the scale of the gain per beneficiary, if that is possible.
I think taking a second partial surrender means no TSR on that chargeable event, but TSR is still available when it is fully surrendered, by reference to the original term.
Full surrender of Bond 4 would mean that all the PSA and personal allowance would be lost, if it remains in your sister's hands and no partial surrenders are made.

poseidon1

Jeremy535897 said:

It's not my area of expertise, and I doubt you will find many tax advisers who understand all the nuances. Most of the technical tax expertise lies with the insurance companies.
If your sister was prepared to assign half of Bond 4 to you, that would reduce the scale of the gain per beneficiary, if that is possible.
I think taking a second partial surrender means no TSR on that chargeable event, but TSR is still available when it is fully surrendered, by reference to the original term.
Full surrender of Bond 4 would mean that all the PSA and personal allowance would be lost, if it remains in your sister's hands and no partial surrenders are made.

Have to concur with Jeremy535897, the pool of expertise and  experience in this matter has become shallower especially as more  and more of the  tax advisers with hands on familiarity have retired over the years.

Matters have certainly not been helped by changes to the chargeable event taxation regime, which  from my observation over the past couple of decades, has become progressively more complex.

Bond 4 is the problematic investment, and other than delaying encashment until a point where your sister's income reduces to basic rate ( you indicate she is still working), its difficult to see many opportunities to avoid a sizeable liabilty. 

If the decision is made to delay encashment for awhile, it maybe prudent to review the unit trust funds it is  currently invested. If there remains a significant exposure to equities, it may already have taken a bit of  a valuation hit as result of the Tariff war initiated by USA, so consideration could be given to reviewing whether the current risk profile should be adjusted depending on the expected date of future encashments.

In the meantime it certainly wouldn't hurt to try and get another opinion of the situation from the life company for bond 4 ( if they are so inclined).

taxistaxing

@Jeremy535897 @poseidon1

Thank you both so much for your responses, help and guidance once again. Both having the same thought as me with regards finding someone with the very specific knowledge required to advise...!

Really appreciate it.

Best,
taxistaxing