Session 006: Bits and bobs about bonds Q&A

We have had clients with bond gains over £10k who have just phoned or written to HMRC rather than complete a tax return - is this not a valid route?

You could attempt this route but our understanding HMRC will require the individual to self-assess if the total savings and investment income exceeds £10k. This is what their self-assessment tool confirms but is also confirmed in help sheets HS320 and HS321 in the “how to report a gain” section.

If non tax payer re offshore bond or basic rate re onshore bond if you realise a gain above £10k (not within 5% deferred allowance) from either you need a tax return?

Correct.  Please also refer to the answer to the previous question above.

Submitting a tax return if savings income is over £10k. Is that the full gain? Or the top sliced gain?

It would be the full gain.

What is the significance of £150,000; why is the threshold not £125,140?

To our knowledge HMRC have not explained how they arrived at £150,000 but the change was linked to simplifying and modernising HMRC’s Income Tax services through the tax administration framework.

Change to 150k - people may not notice 60% band. People who need to file may not, and may get fined. Like the reporting requirement going to 3k.. Please be aware that now that HMRC charges penalties for not filing a return where there is a requirement, it may be safer to just eat the frog and file.

It will be important for those have come out of self-assessment because they are now below the £150k threshold to monitor their income levels going forward. They should also keep in mind that the thresholds can change so they will want to keep on top of this to ensure they always meet self-assessment requirements.

It will be the same for those with side-hustle trading income if the threshold is increased from £1k to £3k goes ahead as announced and they have a period where they can come out of self-assessment while the trading income is below the threshold.

Late filing charges have existed since they were introduced by section 106 and Schedule 55 of the 2009 Finance Act.

Offshore bond has capital loss and current value is still less than initial premium. Would a distribution be taxable?

If the bond (or individual segments) surrendered in full, the chargeable gain would show as nil and therefore would not create a tax liability. Depending on the circumstances, deficiency relief might be available. You can read more about deficiency relief in section 12 of our Taxation of investment bonds article.

However, although the position of full surrender (including segments) might currently show a nil gain, if a withdrawal is taken across segments in excess of the 5% tax deferred allowance, this would still trigger an excess gain and that excess gain might create a tax liability in the year it’s assessed, regardless of the fact the economic performance of the bond is showing a loss. If you do trigger an artificially high excess event gain there are way to mitigate it as explained in sections 4 and 5 of our Bond taxation planning ideas article.

Can you repeat the circumstances that trigger the need for a tax return/ supplementary forms to be submitted to HMRC.

We cover when bond gains trigger a need to self-assess our When investments trigger a need to self-assess video

The supplementary forms for when a bond gain needs to be reported in a self-assessment return are form SA101 (boxes 4-11) for onshore bond gains and form SA106 (boxes 43 & 44) for offshore bond gains. You should find the guidance in help sheets HS320 and HS321 helpful.

Do the supplementary forms need to be submitted when there is a loss?

No need to submit a return or use the supplementary forms if the gain is reported as nil and deficiency relief is not relevant.

If deficiency relief is relevant and you want to use the relief to reduce tax on other income you would need to self-assess and complete the relevant supplementary forms.

You can read more about deficiency relief in section 12 of our UK investment bond taxation article.

Is the paper date not October 25 rather than 26

Yes, that is correct and good spot. Unfortunately there was a typo of on the slide.

If a solicitor is asked to conduct a deed of variation in order to create a trust for a beneficiary in receipt of benefits is that benefit fraud?

I think I misheard the question during the live Q&A.

As I understand it now, you appear to be suggesting someone entitled to an inheritance who is not on means tested benefits themselves, varies their inheritance by deed of variation (DOV) to create a trust for someone else who is on means tested benefits. This would be ok on the assumption the DOV creates a discretionary trust (in which case the intended beneficiary has not received an absolute gift that would need declared).

The circumstances would be different if the person entitled to the inheritance was on means tested benefits and then varied their inheritance. For example: 

X dies and there is a bequest in their will of £100k to Y absolutely.

Y is on means tested benefits.

Y varies their inheritance by deed of variation (DOV) into trust but fails to inform the benefits agency of the inheritance or the solicitor drafting the DOV. This could be treated as benefit fraud and most certainly deemed deliberate deprivation.

So if trust LENDS out to beneficiary is that ok- ie we would want to assign so can be encashed as BRT- but the loan may be called back when beneficiary dies?

Trustees can lend trust capital to a trust beneficiary if the trust provisions allow it. When a loan is made is should be done using a formal loan agreement setting out the agreed loan terms. A solicitor would be able to prepare a suitable loan agreement for the trustees and the beneficiary. It is common for the loan to create a debt on the beneficiaries estate and any outstanding loan on the beneficiary’s death to be repaid.

If the bond was assigned to achieve the loan to the beneficiary then the assignment would be for monies worth and trigger a chargeable event in the hands of the trustees. Therefore it would not achieve the objective of having the bond gain liability being assessed against the assignee i.e. the beneficiary receiving the loan. On the assumption it’s a discretionary trust, the bond gain would be assessed against the settlor(s) assuming they are alive and UK resident. That being the case, the trustees would be as well surrendering and then lending the cash proceeds. Surrendering the bond would also avoid the need to pay a solicitor to draft a deed to assign the bond for monies worth as that’s not a type of deed that’s available from bond providers.

If the settlor(s) are not UK resident or died in a previous tax year then any gain would be assessed at the trust rate (45%). In such a scenario they might need to reevaluate the strategy of lending money to the beneficiary or the amount they will loan to the beneficiary. For example, if there is unused tax deferred allowance the trustees could withdraw that without triggering a chargeable event. Whether that will be a sufficient amount to lend will depend on the circumstances. The trade off might be to distribute capital to the beneficiary, instead of lending them capital, if the tax implications are problematic.

So a partial withdrawal from bond that creates a chargeable gain, the register has to be updated by the trustees, even if it's already registered?

When a new bond is set up a bond in conjunction with a bond providers trust (e.g. a Gift Trust, Loan Trust, Discounted Gift Trust, Flexible Reversionary Trust or Probate Trust) it’s fairly common for there not to have been a tax event yet. As such the trust is initially registered as a non-taxable express trust. If the trust becomes taxable the TRS needs to be updated and additional information about the trust needs to be detailed on the TRS.

A tax event could be a chargeable event on the bond or it could be an IHT event e.g. periodic or exit charges if it’s a discretionary trust. In respect of bond gains, it will only be a tax event making the trust taxable if the trustees are liable for the gain at the trust rate. The trustees will never be liable for bare (absolute trusts). The trustees of a discretionary trust or interest in possession (IIP) trust won’t be liable either if the settlor is alive and UK resident in the tax year of the event. You can use the decision trees in section 4 of the our Important information about trusts guide to determine the scenarios when the trustees would be liable for discretionary and IIP trusts.

Information about additional information required on TRS for taxable trusts can be found in section 32080 of HMRCs Trust Registration Manual.

Tax reporting for off shore bonds in trust, is the taxation of these just the 10 year periodic charge? Or do trustees also have to report gains annually?

Tax reporting in respect of the offshore bond will only occur for the trustees if they trigger a chargeable event gain and the trustees are liable for the gain. See section 4 of our Important information about trusts guide to determine when the trustees could be liable for a gain at the trust rate.

The 10-year periodic charge for discretionary trusts is an IHT matter for the trustees and not related to taxation of an investment bond gain for bonds held by trustees of a discretionary trust. The value of the bond (not chargeable event gains) will be relevant for periodic charge calculations.

What is Tax position of Disabled Trust Offshore Bond 20yr Period ending had full return of capital 2.8 million value still 2,6 million?

When you refer to the 20-year period I assume you mean the end of the 5% tax deferred allowance accumulation period? If so, there is no automatic chargeable event. However, on the assumption the client was taking £140k regular withdrawals (i.e. 5% of a £2.8m premium) across all segments  then a £140k gain will be triggered at the end of the 21^st policy anniversary. On the assumption the trustees have or will do a vulnerable persons election, that gain will in effect be taxed as if it was taxed against the disabled beneficiary based on their income tax position.

The worrying aspect here is that there’s currently an overall gain of £2.6m which is obviously going to create a large tax bill even if it is assessed against a non-taxpaying disabled beneficiary. It would appear that the bond gains have not been managed appropriately over the last 20-years. The 5% tax deferred allowance can be useful for certain circumstances but it’s kicking the can down the road from a tax perspective. If the beneficiary has been a non-taxpayer over the last 20 years it is likely the gain could have been managed better by adopting a segment surrender approach to meet the withdrawal needs and making use of the beneficiaries unused allowances to have chunks of the gain suffering no tax at all.

How can trustees appoint benefits to a minor and who will need to declare the tax in respect of the minor?

They can use a deed of appointment to appoint segments onto bare trust for the minor. Note, this planning only works if the parental settlement rules don’t apply i.e. the settlor is not the parent of the unmarried minor beneficiary. You can read about the parental settlement rules in our Bare Trust taxation article.

If the gain needs to be reported via self-assessment, the parent of the child can file the return on their behalf.

Re bond in trust - assigning to beneficiaries and it hasn’t previously been registered at TRS by settlor- needs doing now?

On the assumption the trust is not exempt or taxable then yes it should be registered. HMRC have been adopting a light touch to breaching deadlines so a penalty might be avoided. However, that might not always be the case so they should register asap. You should find the guidance in our Trust Registration Service article helpful.

IVB in trust - If 1st policy holder died in 2014, and 2nd policy holder dies this year, will this be taxed all on the 2nd policy holder?

It depends on the type of trust and if a chargeable event has actually occurred this tax year.

If it’s a bare trust then it will be against the bare beneficiaries.

If it’s discretionary or interest in possession (IIP) trust then 50% of the gain will be taxed at the trust rate and 50% of against the settlor who died this tax year but only if a gain is triggered in the tax year of death of the last settlor to die e.g. they were the sole or last remaining life assured or the trustees surrender the bond in the same tax year as their death. You should find section 4 of our Important information about trusts guide  helpful to determine who’s liable for a bond gain when the bond is held in trust.

Note, the above comments for discretionary and IIP trusts is based on who the Settlor(s) of the trust were – not the policyholder. For a bond in trust, the policyholder would be the trustees and the trustees might not be the same people who are the Settlors of the trust. Ideally, you wouldn’t want the settlors to be the only trustees until both die as that means there won’t be a trustee to administer the trust fund. There is guidance in our Changes to trustees article about what happens with the last trust dies.

In addition to the above, there might not have been a chargeable event because of death (because there’s a surviving life assured or it’s an offshore bond on a capital redemption basis). If the bond didn’t end on someone’s death then the trustees will also be able to consider assigning the bond or segments to trust beneficiaries first. That way the beneficiary can then decide when to trigger a gain at a suitable time for them (if it’s a bare trust) or for discretionary or IIP trusts, avoid the trust rate applying to 50% or 100% of the gain, assuming the beneficiaries are not 45% taxpayers.

What about appointments to minor nieces and nephews?

Yes, that is ok.

If the grandparents, aunty or uncle etc are the settlor(s), then an appointment of segments onto bare trust for the minor will mean the gain on subsequent surrender by the trustees can be assessed against the minor beneficiary.

It doesn’t work if the settlor(s) are the parents of the unmarried minor beneficiary, due to the parental settlement rules.

You can read more about the parental settlement rules in our Bare Trust taxation article.

As Bond is not considered for the Financial Assessment of long term care their residence would be. Therefore is this still useful for planning?

I’m not quite sure what you mean. If you could clarify the question with your M&G account manager they will forward the question to us to respond. Or if you would like to discuss with someone in our team, your account manager can set up a call with us.

To assign a Int Prudence bond to UK res, the Deed of Assignment states, that this will result in a chargeable event if any are UK residents, is that correct?

That doesn’t sound right to me and I’m not aware of a such a deed with that information on it.

If you can share this deed with your M&G account manager they can get in touch with us and we’d be happy to review it and check the accuracy of the information.