Offshore Discretionary Loan Trust Bond

[ange188]

My mother set up an offshore Discretionary Loan trust Bond with Friends Provident International in 2012, through her Bank Financial Advisor ( the band no longer have their own advisors) The Loan trust was set up with £120,000. My mum, sister and myself were trustees and my sister, 2 brothers and I are the beneficiaries.

My mum passed away in December 2017. We have now completed Probate and the £120,000 loan was declared as part of the estate on the probate forms but no IHT was payable on the estate.

Because we were also trustees the loan trust Bond has continued on mum's death and we focused on sorting out he estate. We now want to encash the Bond and distribute it between the four of us. I assume that the £120,000 loan part of the trust will have no tax implications as it is part of the estate. However I am confused as to what Tax may be payable on the gains made in the Bond. What type of tax will be due and who will be responsible for paying it? Is it the individual beneficiaries or the Trustees? How are any gains between my mum's death and now dealt with? Do we need to register the loan Trust with HMRC when we encash the Bond? ( we did complete a trust form as part of Probate but only to declare the Loan of £120,000 as part of the estate, no other information was given) Do I need to do a tax return for my mum?

Anyone's thoughts on this would be much appreciated

[maths]

I assume that the trust is UK resident although the trustees took out an "offshore" bond.

The death of your mother (who was the settlor) would not typically be a chargeable event in which case no UK tax charge arises on her death. Any gain is therefore measured as from the date of original investment to date of encashment.

The cashing in of the bond is a chargeable event; any gain made is subject to income tax not capital gains tax.

The income tax liability will either be that of the trustees or the beneficiaries. If the former cash in the bond the trustees will be chargeable (45%). However, if the trustees appoint the bond out to the beneficiaries they can then encash the bond and any liability to income tax will be theirs. This would be sensible if the marginal rates of income tax of the beneficiaries are 20% or 40% (or even 45%).

Top slicing relief may also be available (but not to trustees).

[ange188]

Thanks for your reply Maths, very helpful.
Can I ask. If we do as you suggest and appoint the beneficiaries their share of the bond and so they will pay their own income tax, as my sister and I are both beneficiaries and trustees will we still have to pay the 45% as trustees on our shares of the Bond?

Also would taking the £120,000 loan out first cause a chargeable event?
If any of us keep our share of the bond as long as we want to and our share of the loan money is not taken out, does that mean that when we do encash our part of the bond the first £30,000 will not be taxable as it is the loan money and only the gain from 2012 would be income tax?

I hope Maths or anyone else may be able to answer these points
Thanks

ange188