Unexpected Chargeable Event gain

DottilyOtterly

Hi helpful money savers,

I’ve already filed my 2024/25 self-assessment return, which included income just slightly over the higher-rate threshold due to variable earnings and poor planning on my part.

I’ve now unexpectedly received around £10,000 from a deceased relative’s life insurance investment bond held in a loan trust with Prudential. The Chargeable Event Certificate shows the chargeable event date as February 2025 (the date of death).

From what I understand, this means the gain technically falls into the 2024/25 tax year, and I’ll need to amend my return to include it. As a higher-rate taxpayer, I believe I’d owe an extra 20% tax (marginal rate of 40% minus the 20% already deemed paid on the bond).

The frustrating part is that I had no knowledge of this before the tax year ended, so I didn’t have a chance to make pension contributions or other adjustments to avoid the higher-rate tax on this gain.

My question is:

Is there any way this gain could be treated as falling in the 2025/26 tax year instead, so that I have time to make pension contributions during the year to reduce the tax liability? Or am I stuck with amending 2024/25 and paying the higher-rate tax now?

Any advice (or confirmation either way) would be much appreciated.

probate_slave

I'm no expert on investment bonds, but surely if the chargeable event is the date of death, then the gain is chargeable on the settlor and should be reported in the deceased's final SA return (with the complication of top-slicing relief). If the date was after death then it would be chargeable on the executors. Either way, you shouldn't be liable for the tax as beneficiary.

poseidon1

DottilyOtterly said:

Hi helpful money savers,

I’ve already filed my 2024/25 self-assessment return, which included income just slightly over the higher-rate threshold due to variable earnings and poor planning on my part.

I’ve now unexpectedly received around £10,000 from a deceased relative’s life insurance investment bond held in a loan trust with Prudential. The Chargeable Event Certificate shows the chargeable event date as February 2025 (the date of death).

From what I understand, this means the gain technically falls into the 2024/25 tax year, and I’ll need to amend my return to include it. As a higher-rate taxpayer, I believe I’d owe an extra 20% tax (marginal rate of 40% minus the 20% already deemed paid on the bond).

The frustrating part is that I had no knowledge of this before the tax year ended, so I didn’t have a chance to make pension contributions or other adjustments to avoid the higher-rate tax on this gain.

My question is:

Is there any way this gain could be treated as falling in the 2025/26 tax year instead, so that I have time to make pension contributions during the year to reduce the tax liability? Or am I stuck with amending 2024/25 and paying the higher-rate tax now?

Any advice (or confirmation either way) would be much appreciated.

Insufficient information to form a view:

Specific questions:

1) What was the date of the trust settlors death?

2) What were the exact terms of the trust pre death? Ie were you a named beneficiary of a interest in possession trust or was it a bare trust?

3) Was the bond automatically encashed by reason of the death of the settlor, or did the trustees make a decision to wind up the trust, and distribute the trust funds under any discretionary powers vested in their favour.

Answers to the above questions will hopefully determine if the chargeable event tax liabilty should properly fall on the deceased, the trustees ( prior to distributing to you) , or you as the end beneficiary.

Are you able to obtain relevant information from the trustees to ensure you have not been lumbered with a tax exposure which is not yours to bear?

DottilyOtterly

Thanks for the comments so far and sorry for the delay in responding. 

1. Date of death was Feb 2025. I'm leaving out the exact day for privacy but can include it if it makes any difference. 

2. Named beneficiary (or to be precise my mother was but she is predeceased and I was her only child and inheritor) of an absolute trust.

3. The bond was automatically encashed at death as I understand it.

The trustee, who I don't know at all apart from this contract, advised the below which I don't have any reason to doubt. Assuming the liability does sit with me I'm just looking to minimise it as far as possible.

"I have taken professional advice on the potential tax liabilities of this sum. It is subject to income tax and, as this was an Absolute Trust, it is for you as a beneficiary to pay any tax that is owing on your share. However, The Prudential is deemed to have already paid income tax at the standard rate of 20%."

All your help is much appreciated.

poseidon1

DottilyOtterly said:

Thanks for the comments so far and sorry for the delay in responding. 

1. Date of death was Feb 2025. I'm leaving out the exact day for privacy but can include it if it makes any difference. 

2. Named beneficiary (or to be precise my mother was but she is predeceased and I was her only child and inheritor) of an absolute trust.

3. The bond was automatically encashed at death as I understand it.

The trustee, who I don't know at all apart from this contract, advised the below which I don't have any reason to doubt. Assuming the liability does sit with me I'm just looking to minimise it as far as possible.

"I have taken professional advice on the potential tax liabilities of this sum. It is subject to income tax and, as this was an Absolute Trust, it is for you as a beneficiary to pay any tax that is owing on your share. However, The Prudential is deemed to have already paid income tax at the standard rate of 20%."

All your help is much appreciated.

OK based on this additional information I have to agree the chargeable event gain does fall squarely to be declared on your personal tax return, due to your status has the residual absolute trust ( bare trust) beneficiary replacing your mother.

With the bond automatically encashed on death of the settlor, there was no opportunity for the trustees to delay the incidence of the  chargeable event gain arising in February 2025. 

Presumably by the time you were made aware ( after 5 April 2025 ?) you had no opportunity to take action in the year to reduce your assessable income by say charitable donations or pension contributions, so regrettably I can see no way now for you to mitigate your higher rate tax liabilty arising on the bond in that year.

DottilyOtterly

Thanks poseidon1. Yes, the first I heard about the trust was in June this year. It's as I thought at the beginning then, with additional tax being due. Still, I want expecting this money at all so it is still an unexpected windfall.