IIP trust & life bonds

[Tameer]

If a deceased had an interest in posession over life bonds in a will trust, then the bond value needs to be declared on IHT 400/IHT418 and may be liable to 40% IHT.
The death triggers a chargeable event and the remaining trustees may be liable to trust tax at 45% less the 20% notional tax paid on the bonds.
The bond value is neither a capital gain not income so the trustees cannot issue a tax credit to the beneficiaries which would enable non higher rate taxpayers to reclaim the trustee tax paid.

Is this all correct - the bonds are taxable twice and non taxpayers can recalim none of it? It doesnt seem fair or reasonable.

[TaxAdviser2018]

There is income tax on the amount realised fromt the chargeable event and this is taxed on the recipient of the income. The net retained "growth" in the bond is subject to IHT where this remains in an individual's estate.

If the deceased has an interest in possession under the terms of a will, would they have otherwise benefitted from the income arising in the bond had the chareable event occured during their life time? There is information relating to the taxation of gains on https://www.gov.uk/government/publications/gains-on-uk-life-insurance-policies-hs320-self-assessment-helpsheet/hs320-gains-on-uk-life-insurance-policies-2015

The original capital value in the bond is also subject to IHT at 40%.

[maths]

If the interest in possession is a qualifying interest then on the death of the interest in possession beneficiary the bonds in which the interest subsists forms part of the estate of the beneficiary for IHT.

A chargeable event does not necessarily arise on the death of the above beneficiary. Such an event only arises if the bonds are surrendered (partial or full); or there is an assignment of the bonds for money; or the bonds mature.

[maths]

If the interest in possession is a qualifying interest then on the death of the interest in possession beneficiary the bonds in which the interest subsists forms part of the estate of the beneficiary for IHT.

A chargeable event does not necessarily arise on the death of the above beneficiary. Such an event only arises if the bonds are surrendered (partial or full); or there is an assignment of the bonds for money; or the bonds mature.

[Tameer]

Thanks for the replies. The deceased beneficiary was also the second life on the life policy. The policy therefore has come to an end and chargeable event certificates have been issued in the name of the benefifiary. The value of the bonds in trust was declared for IHT though when added to the estate, the total was still less than the sum of nil rate bands so no IHT was payable. If that had not been the case then 40% IHT would have been paid.

The final value of the bonds now reverts to the trust and trustee tax may be payable. The trustees want to close the trust and distribute the money to people one of whom is a non resident while the other is on a low income below the income tax threshold. It is not clear that the trustees can issue a tax voucher for the trustee tax paid so that the non tax payers can reclaim it.

If the estate had been larger then it looks like there could have been 40%IHT on the capital value followed by 25% (45%-20% notional) deducted before the final recipients benefited. And no chance of relief.

If the trustees could declare the chargeable event on their personal tax reurn that might help but i am under the impression a separate trustee tax return is required. It would also help if the chargeable event certs in the name of the deceased could be considered as their gain but i have the impression that because the event occured on their death then this is not the case.

Clearly the gain is part of the final bond value. It does not seem logical that the gain is both part of the deceased's estate and at the same time taxable as the income of the remaining trustees. Maybe this is a trap with no escape. I hope it is a riddle for which there is a solution.

[maths]

Who settled the bonds on trust?

What does the trust say as to what happens on the death of the interest in possession beneficiary ?

[Tameer]

Thank you maths. The trust was created and the bonds settled on the death in 2001of the husband of the beneficiary who received the life interest. The trust can now be continued until 2081 or distributed to the remaining beneficiaries. However the bonds do not continue as all the lives assured have now died.

I plan to claim the value of the bonds and create a trustee bank account to receive the cheque.
Unless there is some advantage to continuing the trust then it seems simplest to close it and distribute the remaining value once any tax issues ave been dealt with.

[maths]

It seems the husband on death settled the bonds on an interest in possession trust (an IPDI trust) for his spouse. On her death the bonds are deemed to form part of her estate for IHT.

As the father was the creator/settlor of the trust and he is dead then the chargeable event gain on the wife's death is subject to income tax on the part of the trustees at the trust rate (with a 20% tax credit assuming the trust is UK resident).

The tax payable by the trustees although income tax is levied on capital and hence cannot be utilised by the beneficiaries on any distribution of the trust capital.

An exit charge may arise on any appointment of the capital out to the beneficiaries.