Taxation of bonds in trust

I'm trying to get my head around the taxation of a bond and failing miserably.

The bond was established in 2004, 100 segments, £128,125 paid in. 49 segments were surrendered in 2016 (raised £101,945). Value now £131,924. There are two lives assured on the plan (one is a trustee).

The trustee wants to raise £25,000. If they surrender 10 segments, I've worked out the gain as £13,055. So far, so good.

This is where things to me aren't so clear. I've seen that £1,000 is tax free and there is 25% tax on the remainder (so £3,013.75). Is that correct? I understand that top slicing is not available.

Alternatively, is the 5% rule available to trustees? Would that avoid tax entirely? As no other withdrawals have been made, I assume that the full 5% allowance is available (if allowed), as the withdrawal in 2016 was a full surrender of segments?

Is there something else I'm missing that could be done to mitigate/avoid tax?

My apologies if I'm asking really basic questions, and would really appreciate some help - I think I've dealt with bonds maybe once in the last 20 odd years, and it has always been my weakest subject in exams!

Comments

  • @Andy_Schleider
    What type of Trust?
    Is Settlor still alive?

  • @richardgough said:
    @Andy_Schleider
    What type of Trust?
    Is Settlor still alive?

    Not sure what type of trust - it has the words 'family trust' in it (maybe discretionary?)
    Settlor is dead

    There appear to be two lives assured, one of which is a trustee

  • @Andy_Schleider
    5% deferred tax is available to trustees.
    If settlor died before this tax year, trustees are liable to tax.
    If funds are to be paid out to beneficiaries then the assignment of segments to them with full surrender may be just as useful, and maintains some 5% withdrawals for the trust.
    Life assured irrelevant for tax.
    The words 'family trust' do not give any indication of what type of trust it is. Reading the trust deed should make it clear if it is discretionary or not - essentially does anyone have a clear right to income or capital?
    Hope that helps.

  • benjaminfabibenjaminfabi Moderator

    You can't avoid tax entirely by using 5% withdrawals. You defer it. potentially into the hands of future beneficiaries, and for this reason it should be avoided on distributions of capital

    Assignment of segments is the fair way to distribute trust capital from an investment bond.

    As regards calculations, the easiest way to work out the tax on a bond is to work out the history of one segment and then multiply that up by however many segments you are getting rid of.

    You have 51 segments of £2,586.75 (£131,924/51) with an initial value of £1,281.25 (£128,125/100). A gain of £1,575.50 (£2,586.75 - £1,281.25) per segment. Surrendering 10 segments raises £25,867, of which £15,755 is chargeable gain. This assumes there has never been a tax-deferred withdrawal across all segments.

    But this is really only scratching the surface. There is a lot more to consider before you can know the tax consequences. Utmost has some good CPD resources on bonds, and there was a good online Assembly series last year on here.

    Benjamin Fabi 
  • NathNath Member

    As has been said above a lot more info is needed before anyone could provide a very specific answer. I'm not sure what you mean about the £1,000 tax free though and 25% tax on remainder. If the trustee is surrendering segments within the trust, the trusts have a £1,000 basic rate band, not tax free allowance so first £1,000 taxed at basic and then additional would be 45% not 25%. Unless I am misinterpreting something?

  • @Nath said:
    As has been said above a lot more info is needed before anyone could provide a very specific answer. I'm not sure what you mean about the £1,000 tax free though and 25% tax on remainder. If the trustee is surrendering segments within the trust, the trusts have a £1,000 basic rate band, not tax free allowance so first £1,000 taxed at basic and then additional would be 45% not 25%. Unless I am misinterpreting something?

    @Nath From the post, I think the bond is onshore so they get the onshore bond 20% tax paid leaving a further 25% to pay.

  • NathNath Member

    @richardgough said:

    @Nath said:
    As has been said above a lot more info is needed before anyone could provide a very specific answer. I'm not sure what you mean about the £1,000 tax free though and 25% tax on remainder. If the trustee is surrendering segments within the trust, the trusts have a £1,000 basic rate band, not tax free allowance so first £1,000 taxed at basic and then additional would be 45% not 25%. Unless I am misinterpreting something?

    @Nath From the post, I think the bond is onshore so they get the onshore bond 20% tax paid leaving a further 25% to pay.

    Yeah, sorry Richard I incorrectly assumed Offshore for some reason, although again, more info needed to fully comment, although the standard rate is still there on the £1,000 and not tax free.

    Andy, this link may help

    https://techzone.abrdn.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust#:~:text=If the bond is onshore,tax payable on the gain.

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