Session 007 - wrapped or not, on or off and what about trusts? - Q&A

Introduction

The M&G Wealth Technical team delivered an online technical event wrapping up their bond school series with a look at the use of insurance bonds in financial planning. These are the questions and answers from the live event.

Q What happens after 20 years of a Bond and all the tax deferred allowance has not been used.

A Nothing. A chargeable event only arises once you go over your tax deferred allowance.

You should find our 5% tax deferred allowance video helpful.

Q Can a bond be assigned multiple times?

A Yes

Q Are investment bonds still excluded from the financial assessment for care cost and if so major benefit in maintaining wealth over other investments.

A Technically, it is life policies that are disregarded not investment bonds so capital redemption investment bonds are within assessment. So, yes, but only as long as that was not the substantive reason for using one as that would be deliberate deprivation and bring it into account.

Q Will we be covering funds gifted to bonds for grandchildren, for income tax efficiencies, and did I hear this is being challenged by HMRC?

A Not in detail, but the income tax liability falls on the beneficial owner of the bond so if a bond segment is appointed or assigned to a non-tax payer it will be taxed based on their circumstances unless parental settlement applies. We have not heard of HMRC challenging this.

Q Given the fiscal drag on allowances and thresholds won't the 6/7 figure drop i.e. more higher rate taxpayers will still be higher rate in retirement?

A Looking at the fiscal drag in isolation then yes that number by definition should fall. But there are other factors at play such as the decline in DB pension provision. And remember planning can dictate tax status is no fixed income provision.

Q Legacy planning - lives assured exist beyond death. onshore for personal rep encashment or offshore for beneficiary encashment - your thoughts on outcome?

A We cover this for onshore bonds in the personal rep part of section 10 of our UK investment bond taxation article.

We cover this for onshore bonds in section 4 of our Offshore bond taxation explained article.

Q In the GFC, offshore bonds allowed access to Icelandic Banks. A firm adviser found out that his low risk elderly client lost her money when the bank failed. FSCS N/A?

A FSCS protection applies if your product provider defaults. In the scenario you describe the client’s product is the offshore bond and the bond provider is not in default which is why the policyholder would not have an FSCS claim to make.

The bond provider would be treated as a single depositor with the bank for all policyholders and in some circumstances the bond provider could make a claim, depending on what investor compensation scheme was available in the jurisdiction the bank was based. Any compensation paid would then be shared proportionately between the bond policyholders. Unfortunately in some circumstances there was no compensation scheme or the amounts paid was negligible when distributed proportionately between bond policyholders. 

Q How is property income taxed?

A Within the bond it would be the same as interest, so broadly 20%.

Q Investment Bonds have a reporting requirement to HMRC. I am told the CGT reporting requirement on a GIA rests with the investor. Is that correct?

A With bonds the provider and the individual have a reporting requirement, with CGT the investor must report if their surrender proceeds are over #50,000 regardless of whether there is as CGT liability. There was an OTS CGT simplification suggestion in the past suggesting CGT reporting should be done by the asset owner.

Q Although a non-tax benefit of a bond is there is no tax admin... once a chargeable gain is triggered what are the tax reporting requirements then?

A If the gain when added to other income is over ten thousand pounds you need to self-assess. Obviously, like any other income or gains if the self-assessment requirement is not triggered you still have to notify HMRC to pay your tax.

Q On the death of a Bondholder using an offshore bond what reporting is needed to HMRC when the funds are bought onshore for distribution?

A As per the question above based on who is liable. The provider will also notify HMRC of the gain.

Q Is there any reason why capital redemption policies only seem to be available offshore?

A It’s an esoteric subject but our broad understanding is that a capital redemption policy doesn’t satisfy the conditions for UK life assurance business rules but is an allowable for overseas life assurance business rules

Q Can you please remind me when a Discretionary Trust becomes taxable and needs to be reported to the TRS?

Almost all discretionary trusts need reported to the TRS whether they are taxable or not. They need reported as, or updated to, taxable if they have a liability to Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax and (in Scotland) Land and Buildings Transaction Tax or Land transaction tax (Wales).

Q Why does the example only use a £10,000 ISA contribution, would it not alter the overall in the example if the full £20k was withdrawn and ISA each year ?

A The tool was showing regular withdrawal in addition to the ISA wrapping.

Q Does the calculator account for the loss of the personal allowance as the CEG goes through the £100k - £124,140 range - or do we need to add this in manually?

A It does full tax calculation based on rates bands, allowances, income / gain levels and reduces personal allowance where applicable. There are basically lots of tax relief modeller’s behind the scenes.

Q Interesting to hear the overall tax on on/offshore. Is there a way to calculate the benefit in the gross roll up of offshore? and the impact on net return?

A The tax wrapper comparison tool has onshore and offshore and will model the different results

Q Will the tax tool also take into account dividends moving into a higher rate band?

A It does indeed!