Cashing in investment bond held in flexible trust

DT2001

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. Should they wait until the 7th anniversary for the bond to be outside of estate or does the encashment just mean the cash equivalent to the original bond premium is a PET until the 7th anniversary?

Are there any other alternatives or implications to consider apart from timing?

poblomov

A transfer into a trust 6 year's ago is unlikely to be  PET. A lot more information would be needed e.g. who was the settlor, what are the terms of the trust, what's the value of the bond, how old are the beneficiaries, what's the level of the beneficiaries' taxable income

DT2001

poblomov said:

A transfer into a trust 6 year's ago is unlikely to be  PET. A lot more information would be needed e.g. who was the settlor, what are the terms of the trust, what's the value of the bond, how old are the beneficiaries, what's the level of the beneficiaries' taxable income

Settlor is their widowed father. Bond premium after IFA fees £116.4k value now £126k, withdrawals £2.6k. Beneficiaries both low BR taxpayers in their 20’s. All I know is it is a flexible trust that appears to be completed on a standard form.

dunstonh

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. 

No fund options sounds extremely strange.   Typically investment bonds have a couple of hundred funds up to whole of market.    Single fund investment bonds sound like something from the 1980s.  

Is it performing badly or that down to the period in question?   (e.g. if it's heavy in bonds, then we have just gone through the worst period for bonds in over 100 years, although that period has gone now)

poseidon1

DT2001 said:

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. Should they wait until the 7th anniversary for the bond to be outside of estate or does the encashment just mean the cash equivalent to the original bond premium is a PET until the 7th anniversary?

Are there any other alternatives or implications to consider apart from timing?

Two entirely separate issues here. Potential encashment of the bond, and termination of the trust. Important not to conflate the two.

Encashment of the the bond  by the trustees should not mean the trust has been terminated, merely that the trust then holds cash subject to the beneficial rights conferred  by the trust deed on the beneficiaries. Indeed the terms of the trust should permit reinvestment in an entirely separate and distinct investment bond ( with more flexibility and fund choices) if the settlor considers the original purpose of the trust remains valid.

 In this regard, it would be helpful to provide a redacted copy of the trust deed to determine if beneficiaries are entitled to trust income as it arises or income and capital  is distributable at the trustees discretion.

As for IHT, there is no especial advantage or disadvantage in delaying the termination of the trust ( if that is  what is desired) by awaiting the expiry of 7 years after making the trust gift.

The gift into the trust is set in stone, all that would happen if death occurs inside 7 years is that the settlor's nil rate band on death would be diminished by the value of the original gift. That potential  diminution in the nil rate band is entirely unrelated to the current value of bond or whether or not it is  retained.

 If the settlor is happy for the trust to be terminated and funds released to his children to use as they please, the only immediate issue is potential income tax on the bond gains. If the settlor is currently a higher rate tax payer, investment bond gains are taxable on him if the bond is  encashed by the trustees.

 You say the  children are basic rate tax payers so  it might make sense to terminate the trust in their favour and then assign equal shares in the bond to them to encash in their own names. The following technical guidance explains further.

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

Finally you have not indicated whether the bond is a UK policy ( where income tax is deemed deducted at source at 20%) or an offshore policy accruing profits on a gross untaxed basis. If Offshore, the bond chargeable event regime may give rise to tax liabilities on the children ( when they encash)  even if they are only basic rate tax payers in their own right and despite the availability of 'top slicing relief'.

poblomov

DT2001 said:

poblomov said:

A transfer into a trust 6 year's ago is unlikely to be  PET. A lot more information would be needed e.g. who was the settlor, what are the terms of the trust, what's the value of the bond, how old are the beneficiaries, what's the level of the beneficiaries' taxable income

Settlor is their widowed father. Bond premium after IFA fees £116.4k value now £126k, withdrawals £2.6k. Beneficiaries both low BR taxpayers in their 20’s. All I know is it is a flexible trust that appears to be completed on a standard form.

A "flexible" trust could be one of a variety of trusts and variations of them. As poseidon1 indicates, it's important to establish exactly what type of trust it is and all beneficiaries' entitlements. Also establish what the IHT position was on creation.

Who has been making the withdrawals?

Is there any chance that it was created in connection with the deceased mother's will, possibly by a deed of variation?

DT2001

dunstonh said:

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. 

No fund options sounds extremely strange.   Typically investment bonds have a couple of hundred funds up to whole of market.    Single fund investment bonds sound like something from the 1980s.  

Is it performing badly or that down to the period in question?   (e.g. if it's heavy in bonds, then we have just gone through the worst period for bonds in over 100 years, although that period has gone now)

I am getting information 3rd hand. There are 2/3 other trusts with bonds (2 of which have been in force for over 25 years and are paying out a regular amount) so maybe they are confused. I’ll get them to check. I have found a copy of the trust document (hopefully link below in answer to the next post). 

It is performing poorly compared to the other bonds in trust that are all supposedly in below average risk investments/bonds.

DT2001

poseidon1 said:

DT2001 said:n

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. Should they wait until the 7th anniversary for the bond to be outside of estate or does the encashment just mean the cash equivalent to the original bond premium is a PET until the 7th anniversary?

Are there any other alternatives or implications to consider apart from timing?

Two entirely separate issues here. Potential encashment of the bond, and termination of the trust. Important not to conflate the two.

Encashment of the the bond  by the trustees should not mean the trust has been terminated, merely that the trust then holds cash subject to the beneficial rights conferred  by the trust deed on the beneficiaries. Indeed the terms of the trust should permit reinvestment in an entirely separate and distinct investment bond ( with more flexibility and fund choices) if the settlor considers the original purpose of the trust remains valid.

 In this regard, it would be helpful to provide a redacted copy of the trust deed to determine if beneficiaries are entitled to trust income as it arises or income and capital  is distributable at the trustees discretion.

As for IHT, there is no especial advantage or disadvantage in delaying the termination of the trust ( if that is  what is desired) by awaiting the expiry of 7 years after making the trust gift.

The gift into the trust is set in stone, all that would happen if death occurs inside 7 years is that the settlor's nil rate band on death would be diminished by the value of the original gift. That potential  diminution in the nil rate band is entirely unrelated to the current value of bond or whether or not it is  retained.

 If the settlor is happy for the trust to be terminated and funds released to his children to use as they please, the only immediate issue is potential income tax on the bond gains. If the settlor is currently a higher rate tax payer, investment bond gains are taxable on him if the bond is  encashed by the trustees.

 You say the  children are basic rate tax payers so  it might make sense to terminate the trust in their favour and then assign equal shares in the bond to them to encash in their own names. The following technical guidance explains further.

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

Finally you have not indicated whether the bond is a UK policy ( where income tax is deemed deducted at source at 20%) or an offshore policy accruing profits on a gross untaxed basis. If Offshore, the bond chargeable event regime may give rise to tax liabilities on the children ( when they encash)  even if they are only basic rate tax payers in their own right and despite the availability of 'top slicing relief'.

https://www.lvadviser.com/service/documentlibrary/get/2CBD5CC3763F40E8AB2761EE6871FBCA/flexible-trust-guide?_gl=1*12w75a7*_up*MQ..*_ga*MTIyNjE3OTk0LjE3NDk4MTcwMzM.*_ga_WY6LDH7LBT*czE3NDk4MTcwMzIkbzEkZzAkdDE3NDk4MTcwMzIkajYwJGwwJGgw

This appears to be the format of the trust with settlor and 3 other trustees and 2 default beneficiaries.

settlor is BR tax payer with at least £20k of the band available.

This one is an onshore bond.

DT2001

poblomov said:

DT2001 said:

poblomov said:

A transfer into a trust 6 year's ago is unlikely to be  PET. A lot more information would be needed e.g. who was the settlor, what are the terms of the trust, what's the value of the bond, how old are the beneficiaries, what's the level of the beneficiaries' taxable income

Settlor is their widowed father. Bond premium after IFA fees £116.4k value now £126k, withdrawals £2.6k. Beneficiaries both low BR taxpayers in their 20’s. All I know is it is a flexible trust that appears to be completed on a standard form.

A "flexible" trust could be one of a variety of trusts and variations of them. As poseidon1 indicates, it's important to establish exactly what type of trust it is and all beneficiaries' entitlements. Also establish what the IHT position was on creation.

Who has been making the withdrawals?

Is there any chance that it was created in connection with the deceased mother's will, possibly by a deed of variation?

It was taken out by their father.

The ‘withdrawals’ are the ongoing IFA fees

dunstonh

I am getting information 3rd hand. There are 2/3 other trusts with bonds (2 of which have been in force for over 25 years and are paying out a regular amount) so maybe they are confused. I’ll get them to check. I have found a copy of the trust document (hopefully link below in answer to the next post). 

Ones from 25 years ago could have a single fund.  Back then it was not uncommon to see with profit bonds, that just had the single with profits fund or a distribution bond which just had a distribution fund (typically UK equity income and gilts mix).   Distribution funds had been off the boil since 2008 but have bounced back over the last year.

However, those types of plans disappeared from the market apart from a few friendly societies or very niche players (not the type used by IFAs).  If you get hold of the provider name, that would give us an indication.

It is performing poorly compared to the other bonds in trust that are all supposedly in below average risk investments/bonds.

you may have seen the other threads on the subject of bonds vs equities and how over the last 7 years, bonds are flat and equities have doubled.    Over 6 years, bonds would have a loss.   So, a cautious portfolio or cautious fund would be heavy in bonds.  Possibly up to 80% of it.    And the returns during that period, which contained the worst run for over 100 years were horrible for those heavy in bonds.  

So, its not necessarily underperforming.  It could actually be performing well relative to its asset mix.  The problem could well be the asset mix and the decision of the trustees to go with a risk level that was unsuitable.

poblomov

You can find a guide about discretionary trusts on the Aberdeen techzone site. If capital was paid out now, the IHT position would follow the rules for an exit charge in the first 10 years. Income tax position is as poseidon1 set out.

As has been said, it is a question firstly of if they want to keep the trust but change the investment