Are you sure it's a Bare trust? Income and gains from bare trusts is taxable on the beneficiary.


You refer to "top-slicing". Is the trust encashing an insurance bond?

Yes it is a Bare Trust and the principal is not liable for tax, only the £40.000 interest, which when added to my Personal Allowance would put me into the 40% rate.

If it is really a *bare* trust and you have been a beneficiary of it since it was set up, then all of the interest earned within the trust has always belonged to you and not to the settlor for the 11 years that it's been running. And so you should have been paying your income tax along the way as the interest was being received inside the trust's bank account (s)... because the nature of the bare trust arrangement is that the trust's accounts are beneficially your accounts even though the trustee controls them for you.

So, if the interest has accumulated and been credited to the trust over time, if you go back and look at what was received by the trust in what year, you *may* find you are late in paying tax for some earlier years (if no tax was deducted at source by the bank or investment company or whatever generated the interest being received by the trust), but that it didn't tip you into higher rate tax for any of those years and the amount of interest you are now withdrawing from the trust in 2018/19 is not actually all current year income.

But if the £40,000 *is* all 2018/19 interest income (e.g. the trust held a ten year bank deposit product with the interest not being available to the trust until maturity which happens to be right now), then:

1) add the £40,000 to all your other income: let's just say for example that other income is £10,000 as you said you were otherwise a non tax payer close to the limit. So your total income is £50,000.

2) deduct your personal allowance of £11850 less the £1185 part of the personal allowance you give to your spouse, so that's £10665. A side note here, it doesn't make sense to give your spouse some of your personal allowance in a year where you are a 40% taxpayer, so tell HMRC you no longer want that arrangement for 2018/19. But just for example with numbers you recognise, we can work with the number of £10665. So the amount of interest income you have in excess of your reduced personal allowance is £50,000 -10,665 = £39,335.

3) The first £5000 of interest income in excess of your personal allowance is taxable at the special "starter rate for savings income" at 0%. So no tax to pay on that, leaving £34,355 of interest left over from the £39,,335 we had after step 2.

4) The normal basic rate band is £34500 wide, but we have already used up the first £5000 at the special starting rate of 0%, so there's only another £29500 of the band to go, at 20%. The £34355 after step 3 less the remaining £29500 of this basic rate band is £4855 unaccounted for.

5) You may have heard of the "personal savings allowance" that most people get towards their savings interest unless they have a super high income, it can be £1000 for basic rate taxpayers but only £500 for higher rate taxpayers. As you're going to be a high rate taxpayer your PSA is £500, tax free. So taking that off the £4855 from step 4, you have £4355 of interest income that's not covered by any allowances, starter rates or basic rate, and will be chargeable at 40%.

So, your total tax bill for the year would be £29500 at 20% (£5900) and £4355 at 40% (£1,742), about £7.6k total. Obviously replace the £40k and the £10k with the actual numbers and fix your personal allowance giveaway for this year but you can follow the above rough model.

This assumes that the (e.g.) £10k of other taxable income you have doesn't include dividend income, which when you have a lot of income would sit on top of that pile of income instead of being lost at the bottom within the persual allowance. It has a different tax rate than 40%.

Also, we're using your explanation that the £40k is just plain boring interest income and not gains on insurance bonds or other types of investments, otherwise all bets are off.

Thank you so much. The Trust is only being wound up now due to my mother's - the Settlor - death.

I am told that I could pass equal shares onto my two grandchildren, non-taxpayers, in order to mitigate the tax. Thus I woukd be paying on 1/3 rd of the taxable amount of £40,000.

It is a Discounted Gift Trust and my mother oulived the 7 years.

*NB this was written while on my commute before having seen the comment above about it being a discounted gift trust*


If you inherit something you can with the consent of the other beneficiaries vary the will or intestacy to have it (or a portion of it) go to someone else, like grandkids etc.

However if you were already the beneficiary of the bare trust for the last 11 years then the interest income received within it has been yours all along, not simply because someone died. So it seems a bit late to be saying you wanted to give two thirds of your ownership away before the interest income was earned.

Seems there is something here that hasn't been explained about the nature of the ownership, the trust, or how and by whom the interest was earned. But if the person who told you that you could give the income away was a solicitor who has seen the documents they probably know more about it than us. If it was a bloke down the pub then ask the solicitor.

If it is the case that you are no longer going to be treated as the recipient of £40k interest income this tax year and only £13.333k instead, then you won't get as far as the 40% tax bracket. After step 2 assuming £10k of other income for the year, you'd only have £12669 of income above your nil rate band. The first £5k of that amount would be at the starting rate for savings income of 0%, you'd have a £1k personal savings allowance (not £500 as in the earlier example, due to not being a high rate taxpayer) and after deducting the £5k and the £1k from the £12669 you'd only have £6669 that needed to be taxed at 20%.

But that assumes it is all plain vanilla normal interest income arising this year and I don't know how your bare trust has suddenly generated £40k of such income this year that it hadn't generated in previous years (that can be passed to someone else to absolve you of income tax liability on it even though it's yours) so I'll have to bow out.

Ok, both my earlier posts were written before I'd seen you say that.

In that case it's likely that an investment bond product will have been used to pay some ongoing capital out to the settlor along the way (creating the 'discount'), and what you're left with (on top of the capital) that you describe as "interest" on which to pay tax, on is really a chargeable gain on the investment bond. And there's no IHT because she survived the 7 years and her retained interest in it once she died would be considered worthless so nothing is now being inherited, it happened 11 years ago into bare trust.

As it's an investment bond and not just a bit of bank or investment fund interest received, the tax treatment is quite different from a plain boring bit of bank interest. Generally if it was an onshore bond it's considered to be basic rate tax paid with top-slicing relief available to reduce high rate tax where you have capacity within your basic rate band; while with offshore bonds they are fully taxable but still count as 'savings income' so can use the 0% starter rate for savings income and the £500/£1000 personal savings allowance as well as top slicing relief.

Someone else may pop along to help you through it if you're stuck though the advisor/ insurance company whose product it was, or the person dealing with the estate should be able to point you in the right direction. Good luck with it all and it goes without saying, commiserations on the passing of the settlor.

A Discounted Gift Trust is not really a bare trust.

A discounted gift trust (DGT) is a trust-based inheritance tax (IHT) planning arrangement for those individuals who wish to undertake IHT planning but who are unable to lose full access to their investment.
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/discounted-gift-trust/

DGTs come in two variations; I'd guess that your reference to a 'bare trust', means that yours adopted an absolute structure, rather than a discretionary trust structure.

HMRC have this explanation
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20424

A DGT is basically a method of giving away a chunk of capital whilst retaining the income from that capital i.e IHT planning. But the real point is that this is a rather specialist area. If the insurance company can't provide you with the information, I suspect you are going to have to pay for advice.

The OP could be forgiven for thinking that the type he has is a bare trust given the Pru document you linked described the trust types as being either discretionary or bare/absolute.

Effectively in that situation the bond belongs to him with effect from 11 years ago, hence is now out of the clutches of IHT, except one feature of the bond will be that it has probably paid a certain amount of capital back to the settlor at periodic intervals since it's been going (presumably within the 5% limits). There are some different variations on a theme of how it could have been set up.

No argument that the use of this sort of wrapper does make it more complicated than a simple gift of cash or other assets generating interest or dividends or capital gains etc, but whichever company or adviser set it up can probably advise how it works.

Below may be helpful to OP?


http://www.scottishwidows.co.uk/extranet/literature/doc/51092
re "absolute" structure.

http://www.scottishwidows.co.uk/extranet/products/trusts/discounted-gift-income-discretionary re "discretionary" structure.

Thank you, this appears to be exactly what it is as far as I have been informed. It us an off-shore bond (Isle of Man).

"The first step is to distribute the investment from the trust the beneficiaries i.e. to you and ? equally. This is not a taxable event.

A taxable event would only occur in the event that the investment is surrendered ie when cash is withdrawn"

If I am able to receive top-slicing on this, it would make a lot of difference as the FA handling it wants £2.500 - £3.000 to advise me as a client. The other beneficiary already uses him as an FA.