Offshore Bond In Trust: Assign or Surrender?
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!