Readers’ forum: A trust event

/ 29 January 2019

Terry Jordan

Who is subject to tax on an investment bond held in trust? BKL tax adviser Terry Jordan explores this question for Taxation magazine.

‘Gladys was a UK resident who took out an investment bond in the 1990s, consisting of 40 identical policies. Three years later, she set up a discretionary trust for her grandchildren and transferred this investment into the settlement. Gladys was one of the trustees but was not a beneficiary.

Fast forward 20 years and ten of the policies were cashed in and the proceeds were paid into the trust. A chargeable event certificate was issued showing a chargeable gain, the nature of the event a surrender, and the policyholders named on the certificate were the trustees, of whom Gladys was one.

Gladys died in the next year and the remaining 30 policies were paid to the trust. Another chargeable event certificate has been issued, the nature of the event being a death claim. The policyholders showing on the certificate are again the trustees, but this time excluding Gladys, presumably because she has died.

Are both chargeable gains taxable on Gladys personally as settlor rather than the trustees of the settlement?

I assume that the proceeds on death do not form part of her estate, but simply go into the trust? Would they be treated as added property or just a gain?

I hope Taxation readers can help.’ Query 19,300– Dead Cert.

Reply by Terry Jordan: the policies were trust property from the date they were settled

‘We are told that Gladys settled an investment bond she had held for three years from the 1990s on a discretionary trust for the benefit of her grandchildren.

If the trust was discretionary (and did not then qualify as an accumulation and maintenance settlement) the transfer to the trustees would have been immediately chargeable for inheritance tax purposes but if made for no consideration would not have constituted a chargeable event.

The encashment of ten policies during Gladys’s lifetime did give rise to a chargeable event with Gladys as the settlor of a non-charitable trust being liable for the tax due with a right of reimbursement against the trustees (ITTOIA 2005, s 465 (3) and s 538).

It is implicit in the query that Gladys was the only life assured so that her death gave rise to a further chargeable event on the remaining 30 policies. Again, Gladys (in practice her estate) is liable for the tax due.

Because more than seven years elapsed between the settlement of the bond and Gladys’s death there are no inheritance tax implications for Gladys’s estate. The policies had been trust property from the date they were settled.

For a discussion on bonds held in trust, reference could usefully be made to Kevin Read’s article ‘In bond we trust’, Taxation, 8 January 2014.’

This article is also available on the Taxation website.

For more information on how our tax specialists can help you, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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