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TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My mum has a with profits bonds. She invested £140,000 17

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My mum has a with profits bonds. She invested £140,000 17 years ago and it now has an encashment value of £285,000. My sister and I are named trustees on the bond. My mum's income is about £25,000 pa (she is 86 and in a care home), my sister is retired and a standard rate tax payer. I am a higher rate tax payer (income £67,000). My mum would like my sister and me to now share the money from the bond.
What are the tax implications if my sister and I encash the bond as trustees and share the money equally? Do we receive the money and pay 20% on the gain as trustees (I think I read that somewhere)? Is my mum as owner of the bond liable for tax? Are any of entitled to top slicing relief? It's very confusing.
Thanks in advance for your help.
Can you tell me whose life the insurance attached to the bond is on please. Is your mother the beneficial owner of the bond? When were you and your sisters named as trustees on the bond? Why did that happen? Has your mother ever made any cash withdrawals from the bond? Have there been any chargeable events? What is your mother's annual income?
Customer: replied 2 years ago.
Hi Tony,It's just my mother's life insured. My mother is the beneficial owner. My sister and I were named trustees when the bond was purchased in 1997. My mother received financial advice that it would mitigate inheritance tax. Looking at the advice letter it says that the Loan Trust ensures that the growth of the bond is excluded from her estate for inheritance tax. My mother hasn't made any withdrawals from the bond and there have been no chargeable events. My mother's annual income is in the order of £25,000, made up of her pension, my father's pension (he is deceased), disability living allowance, state pension and a small amount of share dividends.
A loan trust usually has beneficiaries who are not the settlor, ie your mother. Otherwise the tax advantages would not exist. Who are the beneficiaries of the loan trust?
Customer: replied 2 years ago.
Sorry my information is unclear. I cannot see any reference to beneficiaries, the documents only refer to trustees and investors (the trust names my mother as the settlor). Checking the documents, my sister was actually added as a trustee on 2/8/1999. My sister and I are referred to as trustees and in the annual statement my mother, sister and I are referred to as investors. The bond is the Clerical and Medical with profits bond and the trust is the CMI loan trust.
Customer: replied 2 years ago.
My mother would be able to afford income tax liability if it fell on her.
You mention CMI in relation to the trust. That's Clerical Medical International. Can you confirm whether the bond is UK bond or an offshore bond please.
Customer: replied 2 years ago.
It's a UK bond. It's just the trust that is international.
Leave this with me while I draft my answer. It will take a while to think through because of the trust angle so please bear with me. I will have an answer for you today.
Customer: replied 2 years ago.
Hi again.
If your mother held the bond outside a loan trust and she cashed it in now, there would be a chargeable event gain of £145,000 (£285,000 - £140,000). The top-slice of £8,529 (£145,000 / 17) would be added to your mother's income but as she would still be nowhere near the 40% tax threshold, she would have no tax to pay as gains derived from a UK investment bond are treated as basic rate tax paid.
If you read Part 2 of HS320 (link below) you will see that the person who is the beneficial owner of the policy, the person who created the trust or the beneficiary of an offshore trust will be taxable on any chargeable event gain on a bond held in most types of trust. HS320 can be found here:
Trustees are normally only taxable on a chargeable event gain if the settlor is dead and the policy continued after their death in which case they cannot be the life assured. Trustees would pay tax at 45% with credit being given for the 20% tax deemed to have been deducted at source.
Trustees are not normally beneficiaries of a trust of which they are a trustee, though its not unknown. A trustee's tax liability is not a beneficiary's tax liability.
The point of a loan trust is to grow a sum of money with the growth being outside the estate of the settlor (your mother) for Inheritance Tax purposes. She is entitled to repayment of the loan at 5% per policy year without incurring a chargeable event gain. The unused 5% allowances or parts thereof can be used in later years. The loan will remain in your mother's estate for IHT purposes unless she waives its repayment. If she did that, it would be a potentially exempt transfer for IHT purposes and the seven year clock would start ticking at that point.
As far as I can see, there appears to be no named beneficiary of the loan trust to whom the fund excluding the loan will pass on the death of your mother or if the policy is surrendered. In that case, it could be a bare trust which rather negates the tax planning done by CMI as any chargeable event gain from a bare trust would be taxable on your mother as she is the named beneficiary of the life policy/bond. That is unless, by "investors", the loan trust documents or the bond policy documents mean "beneficiaries".
Alternatively, the trust could be a discretionary loan trust whereby the trustees have discretion to choose who will benefit from the trust and when that will be. The tax paid by the trustees could be imputed to the beneficiaries who, depending on their circumstances, may be able to reclaim some or all of the tax paid by the trustees.
It may be possible to assign the policy to beneficiaries with no cash exchange. The policy could then be treated as if it was owned by the new beneficiary since it started with the benefit of the accrued top-slicing.
Given the lack of information insofar as who the loan trust beneficiaries are and what type of loan trust it is, it's difficult for me to be precise about the tax position. You should get in touch with CMI to clear these points up and then discuss your mother's wish to surrender the bond and have the cash passed to you and your sister.
The information in the links below may be of interest:
The last link is a google search for the "Taxation" view. A direct page link won't work so click on "In bond we trust", the sixth link.
I would be happy to comment further after you have consulted CMI and clarified the trust status etc.
I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.
Hi,Thanks very much for your response, which is helpful. The CMI trust is a "flexible power of appointment test". It states there are two types of beneficiaries, discretionary and default. I have an encashment form for the bond and it requires signatures from all trustees to make a payment. I think my question is actually what is the tax implication on my sister and me if we each take a 50% share of the full encashment as beneficiaries (as opposed to my mother receiving the money passing it on to us). Ultimately, I am trying to work out if is better to take the encashment as beneficiaries or as a potentially exempt transfer. I am aware this will depend on how long my mother lives.I would be grateful if you could comment on this and thanks very much for the above advise.Keith
Having read a little more about loan trusts since my previous post, it appears that the beneficiaries are absolutely entitled to the growth in the fund and the loan is repayable unless the settlor decides to give that away with potential IHT consequences should she not live for seven years.
If the bond is cashed in, you and your sister will each have a chargeable event gain of £72,500 (£145,000 / 2).
As you are already a higher rate taxpayer, you will be liable to a tax charge at 40% less the 20% tax treated as paid so your net liability would be £14,500. However, as your income would exceed £121,200 you would lose the personal allowance of £10,600 and that will cost you an additional £4,240 in tax. You lose £1 of your personal allowance for every £2 of income over £100,000.
The top-slice will be £8,529 and that will be added to your sister's income to determine whether she goes into the 40% tax band or not. If she doesn't, she will have no tax to pay. If, for example, £2,000 of the top-slice went into the 40% tax band, your sister would have a tax liability of £6,800 (£2,000 @ (40% - 20%) x 17).
If your mother revoked her right to repayment of the loan in favour of you and sister, neither of you would have a tax liability on that gift.
Customer: replied 2 years ago.
Hi Tony,Thank you very much for your full and detailed treatment of my question. I am very satisfied with your responses. I would appreciate one further comment. How does my mother revoke her right to repayment of the loan (by letter to Clerical Medical)? If she revokes right to repayment, then does that mean I would not have to pay any tax at all (i.e. I would not need to pay the £14,500 plus £4,240)?
Your mother would need to write a letter to the trustees to revoke her claim to repayment of the loan.
You would have no tax liability on the loan capital of £140,000 but the tax liability on the chargeable event gain would remain.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Perfect. Thank you very much indeed Tony. No more clarification needed!
Best wishes.