Session 004: Who's liable - Individuals, Estates and Trusts Q&A

Can a spouse be a beneficiary of DGT and a loan be given?

Naming a spouse as a beneficiary is likely to create Gift With Reservation issues and therefore not IHT effective. If a discretionary DGT is used then the spouse, in their capacity as widow/widower, would generally be included in the standard class of beneficiaries. This means that post the Settlor’s death, the trustees could distribute trust capital to the surviving spouse or lend trust money to them if deemed appropriate. If the trustees want to lend money to a beneficiary they should seek legal advice and have a formal loan agreement drafted.

If the bond is owned jointly and both are lives assured, why would there be a need for probate on first death?

There wouldn’t as the survivor on first death would automatically become the sole legal and beneficial owner due to the joint tenancy survivorship rules. Post first death, the survivor could then place the bond into a probate trust to ensure the trustees can claim the death proceeds without the need for probate.

If the policy owners are elderly, waiting until first death before considering a Probate Trust might be problematic. For example, the surviving owner might not have mental capacity to set up the trust and if they have an attorney or deputy, they would require Court of Protection approval to set up a Probate Trust because it’s still a deemed a gift, albeit a gift with reservation.

Who decides the just and reasonable division under a bare DGT chargeable event and are HMRC bound to accept that?

Ultimately it is up to HMRC but the trustees should attempt to make the decision. The trustees can use the guidance we obtained from HMRC directly which you can find in section 6 of our Discounted Gift Trust article.

If settlor of a bare DGT is deceased, how can the gain be assessed on them on a ''just and reasonable basis'' - is it the income at death that is used?

My apologies, there was a typo on the slide and neither of us clicked when your question was raised. In this scenario (death is the chargeable event) we would expect the gain to be assessed against the beneficiary. The slide incorrectly stated the Settlor would be liable. The slide has been corrected and I will also point this out in the next session.

Please refer to section 6 of our Discounted Gift Trust article for further guidance.

What happens if the settlor dies on the 5th of April?

It will depend on whether their death triggered a chargeable event. If the Settlor was the sole or lasting surviving life assured then their date of death would be the chargeable event date. If they were the sole Settlor of a discretionary trust the gain would be assessed against the Settlor. If it was a joint Settlor discretionary trust 50% of the gain would be assessed against the Settlor who’s death triggered the chargeable event. The other 50% will depend on whether the other Settlor was alive and UK resident when the chargeable event occurred. If alive and UK resident the other 50% would be assessed against the surviving Settlor but if they died in a previous tax year or are not UK resident their 50% share of the gain would be taxed at the trust rate of 45%.

If the sole or last surviving Settlors death doesn’t trigger a chargeable event (due to a surviving life assured or it’s an offshore bond on a capital redemption basis) there wouldn’t be an automatic chargeable event. The trustees could keep the bond running or consider assigning segments to trust beneficiaries.

When do parental settlement rules end? If an assignment is made out of a trust to the beneficiary who must be 18, does this not eliminate this as an issue?

Yes, as the parental settlements rules don’t apply if the beneficiary attains age 18. Therefore an assignment from trustees of a discretionary trust to a beneficiary when they attain age 18 will ensure the gain is assessed against the beneficiary.

Just checking for parental settlement rules I assume this has to be a direct descendant, so a step-parent wouldn’t count as a parent?

It does include step-children.

This is confirmed in Section 4300 of HMRCs Trusts, Settlements & Estate manual.

In the case of a Loan Trust, if settlor exceeds their 5% tax deferred allowance, how does tax liability recovery work? For example, if the Settlor’s tax bill was £4k, I assume the £4000 recovery would come from the 'growth' part?

The trustees would need to take a further withdrawal from the bond to repay the £4,000 liability. That withdrawal would not disturb the amount of the Settlor’s outstanding loan amount (if any) but would in effect reduce the trust fund value. The trustees would also need to be mindful that the additional withdrawal to meet the tax liability may also result in a further chargeable event.

Bond into Trust 2004. Sole L A died in this tax year...so gain chargeable to life assured or UK Trustees? Dead settlor rule no longer apply ( even 2004 Trust?)

If the bond was transferred into trust in 2004, the dead settlor rule won’t be relevant.

Section 3230 of HMRCs Insurance Policyholder Taxation Manual states:

There is a transitional provision that applies where both the trust and the policy were in existence before 17 March 1998 and

·       at least one of its creators was an individual, and

·       one of the creators died before 17 March 1998.

In this case, provided the policy has not been varied on or after 17 March 1998 to increase benefits or extend its term, there is no charge on the trustees.

If the last life assured has never taken and income and has years of deferred gains how are the beneficiaries taxed once the bond owner/last life assured dies?

The 5% tax deferred allowance only applies to partial withdrawals taken across all existing segments by the bond owner (not the life assured) during the lifetime of the bond. The tax deferred allowance is not relevant when performing a final gain calculation. A final gain calculation is performed on death of the sole or last remaining life assured or when the bond (or individual segments) are fully surrendered.

For example, if the sole or last surviving life assured died, the gain formula would be:

(Surrender value + previous withdrawals)

minus

(Premium(s) paid + Previous Excess events)

= Gain

Are the decision trees from these presentations available to download / use when the situation arises?

Yes, you can find them in section 4 of our Important Information about Trusts guide.

Policyholder assigns the bond to the child and both policyholder/lives assured dies. Do proceeds need to be recorded on the policyholder's IHT probate form?

No, the bond proceeds would not be relevant. However, each owner will have made a Potentially Exempt Transfer (PET) and if they died within seven years of the PET, the details would need to be recorded on form IHT403.

If a single settlor and sole life assured dies on the 4th April, is the tax always assessed on the settlor despite all forms / surrender being after 5th April?

Yes, as the chargeable event date was the tax year of their death.

If a bond is assigned, can the new owner add lives assured?

In theory, it’s possible but most bond providers don’t allow a change in life assured. This is because HMRC deem a change in life assured as a fundamental reconstruction which would trigger a chargeable event. As such, there is little point as the assignee could just surrender the bond which would also trigger a chargeable event and then set up a new bond. The new bond can then be established with the desired life or lives assured.

If bond assigned from joint owners to lower taxed spouse and income taken, how is this taxed once 5% allowance exhausted?

I think the 5% tax deferred allowance is a red-herring. Who’s assessed for a gain, whether is a final chargeable event gain or excess event gain depends on beneficial ownership.

You wouldn’t use a gift assignment to assign from joint to single just to achieve future gains being assessed against the lower taxpayer spouse because that’s not an outright gift. If the higher taxpayer spouse will benefit from the bond withdrawals post-assignment (directly or indirectly) then the planning fails due to the settlements legislation and the higher taxpayer spouse would be assessed on their share if HMRC found out.

Tax efficiency is a by-product of a gift assignment, not the purpose. The sole purpose is to make an outright gift with no strings attached. That means the assignor(s) must be certain that they will not be able to benefit again (directly or indirectly) from the money in the bond.

If there was a legitimate outright gift, if the assignee later exhausts the 5% allowance a number of years later, the assignee would be assessed on the excess event gain.

A Brit returns to the UK after 30 years with an offshore bond. He wants to use it for his income source, but also pass or gift the remains to nephews. Trust?

I think this is too wide a question to answer here as there will be a number of factors to consider. For example, should the client crystallise the gain built up now if they can do so with a low tax impact due to the benefit of time apportionment relief? Is an offshore bond still appropriate or would an onshore bond be more appropriate going forward as that will depend on their UK tax position.

In terms of trusts, it will depend on the level of access they require and what control they may or may not require for when funds are distributed to the nephew. For example, a Discounted Gift Trust, Flexible Reversionary Trust, Loan Trust or a combination of all might be suitable options. Would an absolute or discretionary basis (where appropriate) be the best fit (or a combination).

If you would like to discuss the client scenario in more detail with someone in our team, please get in touch with your M&G account manager who will be able to set up a call.

Re earlier question, is it correct that someone returning after a period of long term non UK residence, cannot claim the proposed FIG on offshore bond gains?

That is correct and is confirmed in section 37 of HMRCs Technical Note on reforming the taxation of non-UK domiciled individuals.

I think you said if joint owners half of the value forms part of the first to die’s estate – why is this when survivor inherits ownership?

The joint tenancy survivorship rules simply dictates who automatically inherits the deceased person’s share on first death, rather than this being determined by the terms of their will or the law of intestacy if there is no will. These rules don’t change the fact the value of deceased person’s share will need to be factored into the valuation of their estate for IHT purposes.

To look it another way, let’s assume Mr set up a bond is his name with him and his wife as joint lives assured and Mrs does the same, rather than combining the funds into one jointly owned/joint life assured bond. If Mr dies first the bond would be included in his estate valuation for IHT purposes. If his will states his wife is the sole beneficiary of his estate his executor might assign ownership of his bond to her. Alternatively they might surrender and pay her the surrender proceeds. Either way, the value is now in her estate for IHT purposes even though it was included in his estate.

The outcome is therefore the same as it would be with a joint tenancy bond from an IHT perspective and in both cases, as they are married the transfer to the survivor would be exempt due to the spouse exemption (I’m assuming both are currently UK domicile).

The main difference is the administration position. With the joint tenancy set up the survivor automatically becomes the owner. If they did separate bonds, the survivor would generally need to wait for probate until the bond could be assigned to them or the personal representatives could surrender the bond or claim the proceeds in the event of owner being the sole life assured.

Joint tenancy bonds work for married couples and those in a civil partnership if they want the survivor on first death to have access to their share with no delays. However, a joint tenancy arrangement for those who are not married can be problematic.

I suspect your initial concern might relate to the value of the first to die being subject to IHT but then the full value is then immediately in the estate of the other joint tenant and the implications should the survivor die soon after. Quick succession relief can be available in these circumstances and you find further guidance in  Section 22041 of HMRCs IHT manual.