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bigduckontax, Accountant
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Please can you comment on the accuracy of the following,

Customer Question

Please can you comment on the accuracy of the following, which is in relation to a bond which is part of my wife's late father's estate: Currently, the plan is effectively owned by XXX’s personal representatives (PR or Executors). Probate can be issued, with the understanding that the bond will be either encashed or assigned (see below) to the beneficiaries of the Will in line with XXX’s wishes. Nothing can be done on the bond, as far as I am aware, until Probate is issued.

Once Probate is issued, and presented to Friends Life the Personal Representatives have two options. The first is to simply encash the contract and distribute the money out to the Beneficiaries in line with the will. There would be no tax liability levied on the PRs, but the beneficiaries could have a tax liability if they are Higher Rate Tax payers, or their percentage of the gain added to their income pushes them into High Rate Tax. If they are Zero, or Basic Rate Tax payers there is no further liability to tax. A 20% tax charge would be levied on anyone over the High Rate threshold. Alternatively, the PRs can opt to assign the ownership of the bond to the beneficiaries proportionally and then they can either leave the investment in place or encash it themselves. If they are Higher Rate Tax payers, this route could potentially be beneficial as they can use “top slicing” which could reduce the amount of tax they are liable too

Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
Your surmise appears correct, that would be perfectly normal until the executors or administrator distribute the estate in accordance with the deceased's testamentary writings or, if failing, the rules of intestate succession.
Assuming that the bond is passed on to a beneficiary intact it passes tax free to them, any Inheritance Tax (IHT) due being the responsibility of the executors etc and is met from the estate. There is no IHT until the estate reaches 325K and even that can be inflated by charitable and certain other bequests and if a spouse has pre deceased then any unused 325K from their estate can be added. IHT is at a flat rate of 40% on any surplus over the 325K, but if charitable bequests exceed 10% of the estate the rate falls to 36%.
Any bequests are passed to the beneficiaries at the probate value. The bond, providing its conditions permit, could be sold immediately and there would be no gain for Capital Gains Tax purposes. That is a very common procedure. Indeed it might be sold after probate and before distribution.
Well there you are, a little canter through the possibilities. I suspect that you posted your question before you actually finished writing it, but I may have covered most points for you. Don't hesitate to ask follow up questions if I have missed something or misunderstood the situation.
Customer: replied 2 years ago.

Hi Keith, just checking you read the full quote after I edited it.

The quote (from a 'Financial Adviser', not accountant) seems to imply that if the bond was sold immediately then there could be an immediate higher rate tax charge. You seem to be saying the opposite - "there would be no gain for CGT purposes"?

Expert:  bigduckontax replied 2 years ago.
I hadn't, I now am! Like MacArthur, I will return!
Without full details of the type of bond I simply cannot see how any income tax charge arises on sale by the personal representatives. The full value received would be aggregated into the estate form part of the IHT computation. I would be interested to know the thinking behind the Financial Adviser's opinion.
However, passing the bond on intact to beneficiaries is clearly to their advantage as you suggest. For CGT purposes the acquisition price to the recipient is the probate valuation.
Customer: replied 2 years ago.

What I am trying to understand is the tax position for the beneficiaries - there are 8 just to make it complicated! What has been said is that all 8 can make an individual decision as to whether bond is encashed on their behalf or their share of the bond is assigned to them. The 'logic' is that if it is encashed then this could create a chargeable higher rate tax event. I don't really understand why. Surely any gain has already happened when the bond passed into the estate?

Expert:  bigduckontax replied 2 years ago.
Yes, I was a trifle afraid that this might be the case!
When the bond is encashed, particularly before its expiry, there may be income tax consequences, but if this is done by the PRs before distribution then there is no involvement with beneficiaries and the income tax deductions from the encashment would pass through the PR's account, not the individuals. If it is done after distribution then that is an entirely different kettle of fish and individual beneficiaries, depending upon their personal circumstances, could incur higher tax liabilities.
Customer: replied 2 years ago.

How would the income tax deductions be calculated if it was done by the PRs? Presumably there couldn't be any higher rate tax...?

Expert:  bigduckontax replied 2 years ago.
No, as no individual would, at that stage, be involved.
Customer: replied 2 years ago.

So looked at that way, there would seem to be no good reason for the PRs not to encash the bond, because if they pass on a share, then the beneficiaries might one day get a higher rate tax charge that could have been avoided.

Expert:  bigduckontax replied 2 years ago.
Yes, that is a possibility. It's the eight involved which are the proverbial 'ni**er in the woodpile.' Were there but one it would be so much easier.
Customer: replied 2 years ago.

OK, thanks Keith.

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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