Assignment between bond gains from excess withdrawals
Colinstewart76
Member
An onshore bond has an anniversary of 1 December, held in Discretionary Trust (settlor is still alive). A large withdrawal accross all segments was taken in January this year - more than the tax deferred allowance. Subsequently the bond has been assigned to a beneficiary who wants to surrender the bond, BUT there is a suspended fund in there, so instead would like to withdraw what they can now, another large withdrawal across all segments, and surrender the bond when the suspension is lifted.
I think I am right in saying that provided the fund suspension is lifted and the bond is surrendered before 1 Dec 2026, the gains from the excess withdrawals in Jan and now will be cancelled (final bond year) when it's surrendered. The gain calc will then be based on full surrender and apportioned between the settlor and the beneficiary.
What happens if the bond cannot be surrendered this year and specifically, how will the gain arising on the withdrawals be apportioned between the Settlor and the Beneficiary? Is it the same principle? And should we attempt to estimate the apportionment, or ask the provider?
Comments
Hi Colin.
Have some commentary below - please read in conjunction with the attachment (the attachment is something we're reworking to put up on tech matters). Neil drafted the below but can't get into the tent for some reason.
S510 of ITTOIA says that you need to do a “transaction related calculation” where either of the following have happened earlier in the insurance year.
Where either of these situations apply you need to do a calculation to see if any “relevant transactions” gives rise to a chargeable gain (a relevant transaction is either an assignment for money’s worth or a part surrender). In your case the second bullet applies so you need to see whether the part surrender triggered a chargeable event.
The withdrawal by the trustees
In your scenario the amount of the partial withdrawal in January 2026 exceeded the available tax deferred allowance. This means a chargeable event occurred equivalent to the amount by which the tax deferred allowance was exceeded. The chargeable event occurred at the date of the withdrawal but is taxed in the tax year that the end of the policy year falls. So, although the chargeable event occurred in January 2026, the gain would fall in the 2026/27 tax year because the end of the policy year is December 2026. In terms of who is chargeable on the gain, as the settlor of the discretionary trust is alive and UK resident, it would be assessed against them. The settlor can make use of top slicing relief etc as normal but if there is any tax to pay, they need to reclaim this from the trust otherwise they are making a gift for IHT purposes.
Current proposed withdrawal
If the current owner makes a further partial withdrawal there will likely be a further excess as there is no tax deferred allowance available. I say “likely” because some providers may treat it is a full surrender using a notional value for the suspended fund. I think you definitely need to speak to the provider to see how they will deal with the withdrawal request given there is a suspended fund.
Assuming this is treated as a partial withdrawal, this is also relevant transaction so the chargeable event will occur at the time the partial withdrawal is made and is taxed in the tax year the policy anniversary falls. Assuming no further action is taken e.g. fully surrendering the bond before the end of the tax year, the gain caused by this second withdrawal is fully taxable against the current owner. You haven’t mentioned any figures so I don’t know the size of the gains, but it may be possible to apply to HMRC to have the gain recalculated on a just and reasonable basis if the gain is deemed to be to be “wholly disproportionate”.
Subsequent full surrender
Normally, if you have an excess gain, as long as you fully surrender the bond before the end of the tax year in which the excess gains occur (doesn’t need to be done before the policy anniversary), the excess is simply superseded by the full surrender gain.
Its not as simple as saying the gains arising on the previous withdrawals will be cancelled in this case because of the transaction related calculations but the total gains will be restricted by the “gains limit”. There is an explanation and example of this in the attached article which outlines this well although because the gains in the example are less than the gains limit, they are not restricted.
I would speak to the provider and see what they say especially around how they treat partial withdrawals when there is a suspended fund in play.