Inheritance tax and investment bonds

[Harrington]

I'm hoping to get some advice in plain English please.

My grandmother has recently died and I am named as executor of her will. The main beneficiary of her estate is my mum, her daughter, with some small legacies to her grandchildren.

She was a widow and I have worked out the unused percentage of the nil rate band of inheritance that was applicable at the time of my grandfathers death and added to her IHT allowance which gives a little over £600k before IHT becomes payable.

I know that this is not an excepted estate as on my grandfathers death some legacies were paid before the bulk ofthe estate passed to my grandmother so I am aware that IHT 400 will need to be completed.

Whilst searching for paperwork and documents I have discovered that my grandmother held a several investment bonds in the Isle of Mann where the lifes assured are hers and my mothers. They were all taken out in Aug 2007

From what I have read I think that my grandmothers death makes this a chargeable event and that the bond should pass to my mother as beneficiary of the will but also as the other life named on the policy. If my mother doesn't cash the bond in (it's due to mature/be surrenderded Oct next year) does it form part of my grandmother's estate for IHT purposes? My grandmother made no withdrawls from the bond and theamounts invested are a considerable amount of money which would bring her estate above the nil rate tax band

Also as its held in the Isle of mann does this have any implication?

Any help or advice would be really appreciated, thank you

Wendy

[maths]

If your gmother invested in the bonds and the lives insured were her and her daughter and your gmother retained the bonds then on her death the value of the bonds will form part of her estate for IHT purposes.

Either the bonds will mature on gmother's death which will be the case if the bonds pay out on the first death or, if they pay out on the second death, the bonds will remain in existence and pass under her will.

Under either scenario the bonds (or maturity proceeds) from part of gmother's estate.

However, gmother may have either gifted the bonds to daughter (whilst she was alive) or perhaps may have settled them on trust (eg for daughter). In this case the bonds will not form part of her estate for IHT purposes.

The insurance company will know how the bonds were taken out and if they were put in trust.

The Isle of Man dimension is only relevant for IHT if your gmother was not UK domiciled (very broadly non-British) or for income tax purposes as and when a chargeable event occurs.

[tax_schmax]

There is no chargeable event on your grandmothers death, unless the policy was written on a joint life first death basis. I have never seen such a bond although technically they could exist.

The value at the date of your grandmothers death is included in her estate for IHT purposes.

Isle of Man bonds do not trigger capital gains tax charges, and all income tax is deferred until the income is repatriated. The chargeable event would create an income tax charge. Your mother and the other beneficiaries should take advice on how to treat the bond. Only very sophisticated Isle of Man investment bonds will have a maturity date. What makes you think the bond will mature in October 2012?

[Harrington]

Thank you tax_schmax and Maths quick responses and ones that make sense.

Bond is a Global Investor priviledge account for 5 years - hence date of Oct 2012. It appears to be set up so that my grandmother's is the first life assured with the bond passing to my mother as the second life assured. I cannot see anything to suggest that a trust has been created. Is that likely to have formed part of the bond paperwork or a different document? Think I'm going to have to call the company again and try and get them to explain it to me but your excellent advice certainly makes more sense.

Thank you

Wendy

[maths]

The insurance company will know if the bonds were put into trust; you/gmother would have the trust document.

It is still unclear to me whether the policy pays out on the first death or not (they will know); however, as I commented above, if the policy was not put into trust or gifted by gmother (ie she simply retained them) then on her death either the policy proceeds or the bonds themselves are includable in her estate for IHT.

I

[tax_schmax]

It's a standard Scottish Widows offshore investment bond. It will pay out on second death, (last death among the specified lives assured).

The 5 years will relate to the charging structure. The bond will have fees associated to its establishment and the advice surrounding it. These are often spread over 5 years. The bond will last as long as your mother. She should take advice as she will most likely inherit it as it is. The investment strategy will almost inevitably be unsuitable for her needs as they will most likely differ greatly from your grandmothers. She will also have the burden of UK tax upon encashment if she assumes ownership. Until the bond is en-cashed, all taxes are deferred. Her own situation will create a few alternative scenarios to either minimise or exploit costs or taxes. Presently, the bond still belongs to the estate of your grandmother. This may be the best place to cash it in but you need to take advice to be certain.

[Harrington]

Thank you both again.

Tax_schmax you mention Scottish Widows but the paperwork I have is all for Clerical Medical.

And probably a stupid question but as its offshore doe sthat have any bearing on IHT (my grandmother lived all of her life in England) or will it only have a bearing when encashed and the proceeds brought into the country?

Thank you for your help

Wendy

[tax_schmax]

Clerical Medical and Scottish Widows = Lloyds TSB. It's all the same underneath.

UK domiciled persons are liable to IHT on their worldwide assets. As you mention your Grandmother lived all her life in the UK, she is most likely considered UK domiciled. Therefore, the bond being in the Isle of Man makes no difference for IHT purposes.

The use of an offshore bond in this instance is probably to get into more varied funds, (you mentioned it was a large investment), and to avoid capital gains tax and defer income tax.

[tax_schmax]

An offshore bond defers income tax. When the chargeable event occurs, there will be tax to pay. If your grandmothers estate cashes the bond in, this would be a chargeable event and her estate will need to settle the tax bill. If your mother inherits the bond as it is, she will have to settle the tax when she causes a chargeable event. A chargeable event may be something other than full encashment. Assuming she is UK resident, the tax liability will be to UK income tax.

[Harrington]

Thank you again, it's starting to make a little sense now.

I do appreciate the time and effort that both you and Maths have gone to. Right back to IHT400 and all of its schedules

Thank you

Wendy