Is this a bad idea?
amarshall
Member, Moderator
An adviser has come up with an idea which I am unsure about but he's convinced it will work.
The situation
Clients are a married couple in their mid 80s. Both higher rate taxpayers but kept under £100k to preserve personal allowance.
Amongst their very large asset base are two offshore bonds.
These are no ordinary bonds. They are of a type whereby 999/1000 segments could be surrendered and all the gain fell onto the final segment. Needless to say, HMRC ended this wheeze years ago but the bonds remain in place.
One of them did have this withdrawal made before it was stamped out so it has only one segment and a gain of about £1.35m.
The other still has all 1,000 segments but if anything is done to it other than taking a 5% withdrawal, it reverts to being a single segment policy. The gain on this one is about £2.5m.
On assignment, both bonds auto-surrender in full.
I have been arguing for years that something needs to be done about these bonds because the income tax will be payable on death (both policies are joint lives assured) plus IHT. If we incur the income tax now, at least we could do some IHT planning and try to mitigate that. This argument has finally been listened to but the solution is not exactly what I was hoping!
The proposed solution
The adviser thinks that the way forward is to assign both bonds into a new Ltd company.
On assignment, both bonds will auto-surrender giving the Ltd Co a pile of cash and a large tax bill, but one that is significantly lower than the income tax bill would be on the clients (19% corporation tax vs mostly 45% income tax).
The clients are happy to have an investment company which could potentially be used to buy further business assets that would fit with their existing business interests. Alternatively, family members could be introduced as shareholders and funds extracted to them that way.
The clients have absolutely no need for income or capital from these investments.
Does anyone have any thoughts on this?
Happy to provide more detail if I've missed anything that you think might help.
Thanks
Andy
Comments
I honestly don't know the answer to this (I have been trying to find anything about assigning to a company, but can only find assignment to individual's), however, following this for my own learning. If it works that's a great way of saving a shed load of tax. I had never even heard of these types of bonds before to be honest so its a learning curve for me.
I suppose on that second bond they could take the whole 5% deferred allowances without tax implications and if the assignment does work, then assign 100% of the gains.
Would be interested in others thoughts on this though.
Hi Nath,
Thanks for the reply. It's a bit of a conundrum isn't it!
Sorry, I should have said, all 5% withdrawals have been taken to date
Aaah okay. Yeah, like I said I've never heard of these bonds and also assigning to a company....every day is a school day!
Transfer of money to Ltd Co is a CLT for IHT, unless someone tells me otherwise.
Good point!
Thanks Richard, that's precisely the sort of reply I was looking for!
https://www.taxinsider.co.uk/gifts-to-and-from-a-company-don-t-forget-iht-ta
This article suggests you are correct.
Isn't it an assignment for money or monies worth and so a chargeable event on transfer?
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
It certainly looks like it could be. The assignment is for money's worth (ownership of the Ltd Co).
Does that then challenge the CLT? If they are swapping ownership of a bond to ownership of shares in a Ltd Co have they really given anything away?
Or are they potentially going to get hit for both, totally undermining the adviser's whole idea?
Looks like it could be a double bad whammy. 💩 💩
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
The CLT still applies even if donor of bond owns the company. The legal ownership of the bond has changed so a gift has been made.
The value of the CLT would take account of the increase in value of donor’s shares on the basis that the value of any gift for IHT is the net reduction in value of the estate, not the value of the gift.
Given that the bond would be surrendered automatically on assignment to the company I would have thought that the resulting tax liability impacts this gift value calculation such that there is an immediate loss in value to the estate hence a CLT of some value will arise. Unless there is clear HMRC guidance / case law to the contrary I wouldn't fancy arguing against that with HMRC.
This means you have a CLT, a corporation tax bill on realised gain as well as (potentially) a chargeable event gain for the donors if the assignment is deemed for money or money’s worth.
On that basis this looks a really bad idea, not withstanding considering the tax implications of making payments out in the future, but that really depends on family / beneficiary circumstances.
Given the clients do not need access to this investment I would be looking at ascertaining what the beneficiaries are likely to want - do they want to inherit (& run) an investment company?
Assignment to a Co - is this a chargeable event - I'm going back and fore in my head on this - one Les Cameron at Pru?
Then calculate:
Option 1. IHT and income tax assuming client's die now = net inheritance
Option 2. Inc tax if surrender now and gift proceeds to beneficiaries - show IHT over next 7 years.
Option 3. Inc tax and 7 year IHT if assign (gift) direct to all the beneficiaries
Option 4. Set up invest co, assign into invest co - calc Inc / Corp tax; CLT etc again to show net inheritance.
Decide which is most appropriate and implement.
I spoke with Les about this yesterday and he thinks it is an assignment for moneys worth (caveat, he's not seen all the details etc)
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
Thanks again @richardgough for the comprehensive answer.
And thanks to @richallum for asking Les.
I as I suspected, the advisers enthusiasm was somewhat misplaced!