Offshore bond (under DGT) tax liability
Anna
Member
Hi All,
I'm struggling with this case as I'm not sure how the tax liability should be calculated.
Initial investment of £54,000 in 2004 into an offshore bond and placed in DGT (discretionary trust) + taking 5% withdrawals (total of £39,150). Policyholder's children are trustees & beneficiaries (daughter UK resident and son Australian resident). Policyholder (UK resident) died in 2016/17. The plan has retained its value and was about £58k at policyholder's death.
I understand there is no IHT liability for the policyholder but trustees are subject to income tax at 45% (trust tax rate)?? Please help as there is not much info online..
Many thanks
Anna
Comments
The Finance Act 1998 amended the rules relating to the taxation of gains arising under a trust policy. On the happening of a chargeable event on or after 6 April 1998 gains are assessed on the following persons:
(i) On the happening of a chargeable event, if the person who created the trust ('the creator') is UK resident and alive gains will be assessed to tax on the creator – but see also (ii) below. For this purpose 'creator' has an extended meaning to include any person who adds property to a trust whether directly or indirectly (i.e. creator means all people who have contributed to the trust).
(ii) Where the policy is held under trust and immediately before the chargeable event in question occurs the creator is not resident in the UK or is dead, or in the case of a trust created by a company or 'foreign institution' (see below) that company or institution has come to an end by whatever means (e.g. winding up or dissolution), gains will be assessed on the trustees at the rate of 45% if they are resident in the UK for income tax purposes at that time.
Despite the words in the legislation 'before the chargeable event in question occurs', it is the view of HMRC that in cases where the creator has died whilst UK resident, the trustees will only be assessed if the creator died in a previous tax year. Gains arising in the tax year of the creator's death will therefore still be taxed on the creator.
Where a chargeable event gain arises under a policy held on charitable trusts with UK resident trustees on or after 9 April 2003, tax is due at the basic rate of 20%.
Where a chargeable event gain is assessed to tax on trustees who are resident in the UK the 45% trust rate will not apply to the first £1,000 of gross income in a tax year. This £1,000 band is known as the 'standard rate' band and income which falls within the band is taxed at 10% or 20% depending on the nature of the trust income. For a trust whose sole asset is a life assurance policy the first £1,000 of chargeable event gain in a tax year will be taxed at 20% for a non-UK policy.
If a mix of income is received by the trust then the order in which the standard rate band is applied is
(1) Income subject to basic rate tax, which includes chargeable event gains on life assurance policies
(2) Dividends
Where a settlor has created more than one trust the £1000 standard rate band is spread amongst them equally subject to the rule that the minimum standard rate band for any one trust is £200.
(iii) In the circumstances in (ii) above where the trustees are non-UK resident for income tax purposes, any gains will be treated as income of the trustees for the tax year in which the chargeable event occurs for the purposes of Chapter 2 of Part 13 of the Income Tax Act 2007. The effect of this is that the gains are added to the pool of trust income available for distribution and attribution to UK resident beneficiaries who receive payments out of the trust – section 732 Income Tax Act 2007. This means that, to the extent there is undistributed income in the trust, such payments would be treated as income and assessed to tax on the beneficiary in the tax year of receipt. This rule also applies to charitable trusts.
(iv) Where a chargeable event occurs on or after 6 April 1998, the trust was established before 17 March 1998 and the creator (or at least one of them if more than one) died before 17 March 1998 then the 'dead settlor' rule under the previous legislation will apply and gains will escape the tax charge provided the chargeable event occurs in a tax year following that in which death occurred and provided that the policy commenced before 17 March 1998, was owned by the trust before 17 March 1998 and is not enhanced in any way on or after 17 March 1998.
(v) Where a policy is held on non-charitable trusts and there is no individual or person on whom to assess any chargeable event gain, for example if the creator of the trust was itself a trust, any tax charge falls on the trustees. This rule only applies to a policy issued on or after 9 April 2003, or a pre 9 April 2003 policy which has been varied on or after 9 April 2003 so as to increase the benefits or extend its term, or a pre 9 April 2003 policy under which there has been an assignment of the rights or a share of the rights to a non-charitable trust on or after 9 April 2003.
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The settlor cannot be a life assured under a DGT (and I assume this was the case in 2004) therefore, assuming the life assured hasn't died, the bond just continues.
When the settlor dies, from experience we always recommend the trustees wind the trust up without liability by assigning the bond, or segments thereof, to the beneficiaries and they can dispose of personally, saving quite a bit of trust administration with regards to tax returns etc. Obviously your case is complicated by the Australian resident son.