Investment bond, IHT and income tax query.

[mlgibbons]

Hi
I have a question relating to the distribution of an estate for my wife and her sister whose father died in Jan 2020 in relation to the minimisation of income tax due to gains during the administration period and the possible double taxation on an encashed investment bond.

Interest of £5000 has accrued on two cash balances created by the encashment of death of the deceased and I understand the position relating to the payment of tax on this i.e. executor has paid tax at 20%, beneficiary is liable for any additional tax for the year in which that income is distributed to the beneficiary. This seems quite simple.

What is confusing me is the position relating to an encashed investment bond made on the lives of the joint beneficiaries which on reflection would have been best left unencashed.

The investment bond value was £70,867 when it was encashed by myself and I have now been told that there was a gain arising of £24,148 over 5 years and that £4830 basic rate income tax has been treated as paid.

However, as I understand it if either beneficiary is a higher rate tax payer then additional income tax will potentially be due on the gain depending on when the gain is distributed.

My first question is how I can distribute the gain to minimise tax. For example, can I distribute the main portion of the estate now and distribute the gain arising over a number of years to minimise the tax liability? Over how long as this would extend the period of administration?

Also, occurs to me that IHT was paid on the entire value of the bond £70,867 and now the paying income tax on the chargeable gain is double taxation. What can be done to prevent this? I believe that there is some relief which might only be due to higher rate tax payers but am unclear on its use and how it would relate to the distribution over an extend period.

Lastly, and I know this post is getting long, I placed the investment bond on IHT411 in the section "Listed stocks, shares and investments that did not give the deceased control of the company". Was this incorrect? Is this the cause of the double taxation?

I'll not even ask about "top slicing" etc ........

In summary, it appears to me that we have taxable income of around £29k ( £5k interest and £24k chargeable gain) and I would like to minimise any additional tax associated with the distribution of this and avoid any double taxation.

Thanks in advance.

[maths]

You refer to "encashment" of an investment bond on death.

Either the bond "matured" on father's death OR it did not mature upon his death as it was written on the lives of others (eg children etc). In the case of the latter then on death nothing happened (ie no taxable event) but thereafter the bond was surrendered, presumably b y the executors of father's will.

Who had the beneficial interest in the bond?

[mlgibbons]

Hi
Apologies in advance for my invariably incorrect terminology which is down to my inexperience in the area of investment bonds; something which I had no idea about until recently.

With regard to your question: it is the latter i.e. the bond in question was written on the lives of the two beneficiaries of the will who are also the executors of the will i.e his daughters.

There were two other investment bonds which were written on the life of the deceased and they represent the two cash balances - that I also referred to - as they had "converted" on his death to cash.

After probate, during the collection of the various assets, the bond on the lives of the two daughters was "encashed" (correct term?) and thus converted to cash.

This perhaps was not the best option. Something which I am only realising now and which I am struggling to find clear information on.

Hope that helps to clarify things.

Best regards
Mark

[maths]

If the bond was taken out by father albeit on the lives of others and he retained ownership (ie he didn't settle it on trust as would be normal or give it to other in his lifetime) then on his death the bond would form part of his estate for IHT.

Subsequent to his death it appears the executors (ie daughters) decided to surrender/encash the bond. The executors would be liable to 20% on the "gain" but with an offsetting credit for the tax paid (deemed paid by the insurer) and hence no net tax liability on the part of the executors arises.

Who under the will inherits the bond?

On distribution to the beneficiaries the gain would be grossed up and a 40% or 45% charge arises on the beneficiaries subject to the 20% offsetting tax credit.

Nothing can be done about the apparent "double taxation".

Re any distribution to beneficiaries some timing may be possible eg distribute say in next tax year when beneficiaries' personal tax position may be more favourable.

[mlgibbons]

Hi
Thanks for explaining that. The executor 20% liability appears to have been addressed by SJP who have already paid it. Under the will the daughters inherit the bond.

In your comment, "On distribution to the beneficiaries the gain would be grossed up and a 40% or 45% charge arises on the beneficiaries subject to the 20% offsetting tax credi", I assume that the 40 - 45% refers to the income tax which might be due if they are a higher rate tax payer?

On further discussion with the daughters it appears that the first would not be tipped into the higher tax bracket this year or next while the second would in either tax year.

Given that you have stated that the double taxation cannot be avoided I suspect that the simplest option is to go ahead with the distribution to both and for the second daughter to defer the potential tax by a making an appropriately sized SIPP contribution and to summit a tax return to recover the additional tax over the base recovered by the pension provider.

I must say thank you for your assistance with this. I had posted a request onto Expert Answers yesterday and was quite shocked by the answer that I got back which barely coherent and totally clueless - something for which they attempted to charge me a not small amount of money. Luckily I got that back very quickly when I realised the supposed expert was exactly the opposite.

Thanks.
Mark

[maths]

" I assume that the 40 - 45% refers to the income tax which might be due if they are a higher rate tax payer?"

Correct.

Can't comment on the SIPP aspect.