Offshore Bond In Trust: Assign or Surrender?

Benc4032

Hi all,

I have a technical question that has caused some debate in the office, so much so that I am now doubting what I thought would be the best way forward.

A client settled a significant sum into an offshore bond, in trust, in 2019. He has since drawn the 5% tax deferred amount as income every year. He is an additional rate tax payer with various streams of income including interest from cash held on deposit, rental income, and dividends from unwrapped investments/direct share holdings in unlisted stock. All simple so far.

He now requires an additional sum to cover some property renovations and we have determined that the bond is the most liquid and accessible source. A partial surrender to cover what he needs would give rise to a chargeable event of £250,000. As the settlor is alive and UK res, the tax liability would fall on him. Top slicing relief doesn't do any good because the relieved liability is the same as the unrelieved liability - he's too far above the higher rate threshold for it to make any difference.

My proposal is that he assigns segments of the bond out of the trust to his wife and children, who are all in a lower bracket of tax. They can then surrender these new bonds, make use of top slicing relief and save a significant sum in income tax.

One of my colleagues doesn't think this is possible because the bond is in trust, but on review, the structure is discretionary and the settlor is a trustee. So my initial question is: Am I right in thinking segments can be assigned out of the trust to 'beneficiaries' who can surrender and have the gains taxed on them? or am I getting totally lost in my thoughts?

If you got this far without giving up - thank you!

Best wishes and have a great weekend!

benjaminfabi

Hi,

This sounds like a very complicated situation and more information is needed.

Yes, you can assign segments of a bond in trust to a beneficiary and the tax position is assessed on them (settlor living doesn't impact this). However, if the 'beneficiaries' receive a payout from the trust and immediately give it to the settlor, two things definitely happen:

• The beneficiaries have a significant tax liability themselves.
• The non-spouse beneficiary/ies make a PET of the amount given back to the settlor.

There is also the appointment of capital from the trust to the beneficiaries. Depending on the type of trust, this has its own IHT implications (potentially both immediate and ongoing).

Then there is the issue of the action itself in relation to 'saving a significant sum in income tax'.

Tax evasion – deliberately misrepresenting or hiding information in order to reduce the amount of tax payable or avoid paying at all.

Tax avoidance – using legal loopholes and bending tax rules to stay within the law for financial benefit. It’s not a crime but there's a lot of grey.

Man to wife and son - "I gift you this amount from this offshore settlement"
Wife and son to man - "Thanks, I've now paid the tax on that and I gift it back to you. 😉"

To be effective for tax, assignments must be outright and unconditional.

I feel like it would be difficult to defend an accusation of straight up tax evasion (because the only reason they didn't take the money directly from the settlement was to reduce their tax liability and the assignment is very obviously conditional).

Interested to hear if anyone thinks otherwise, as I'm a natural cautious person when it comes to acting in a manner that very obviously only exists to reduce tax.

richallum

Been involved in a similar case before and agree with what @benjaminfabi says. We got the family solicitor involved as well and her advice was the same - these are associated/linked transactions (there is a technical term but I can't remember) with the sole purpose of avoiding tax.

les_cameron

There's the small matter of how did they manage to get money back from the trust in the first place -assume it wasn't an IHT effective one? Or was it a DGT/Loan.