Trustee investors

Tax benefits

Please note, the information in this section is only relevant to investors who are resident in the UK.

Virtually tax-free growth

As we're a Dublin-based company, our policyholders' funds aren’t liable for any Irish income tax or capital gains tax (CGT), although some investment income may have withholding tax deducted at source.

What tax applies?

Bond gains are subject to income tax. There’s no liability to CGT, unless ownership of the bond has been acquired for money or money’s worth by someone other than the original owner.

Chargeable events

For an offshore bond the main events which will trigger a tax liability are:

• partial withdrawals above the 5% allowance (see below)
• full cash-in (surrender) of one or more policies
• assignment of a policy for money or money's worth
• death of the last life assured

Other changes to the policy can also trigger a chargeable event, for example changing a life assured. But no chargeable event arises when trustees gift the bond to a trust beneficiary.

What gain is taxable?

• Broadly speaking, the gain liable to tax will be:
• the bond value when cashed in, plus any previous withdrawals, less
• the amount invested, plus any previous chargeable gains

For partial withdrawals, the gain is the amount of the withdrawal which is over the available 5% allowance.

5% allowance

• Any unused allowance can be carried forward to subsequent years.
• The allowance continues until it's cancelled out the amount invested.

Tax deferral

There's no liability to tax until a chargeable event occurs. Until this time the bond grows virtually tax free, unlike onshore bonds where tax is suffered yearly at source on the underlying funds. This can give trustees greater control over the timing and amount of any future tax charge.

Liability to tax

The tax liability on bonds held in trust can fall on the settlor of the trust (in other words the person who set up the trust), the trustees or the beneficiaries, depending on the circumstances and depending on whether the trust is discretionary or bare.

Settlor's liability to income tax - discretionary trust

A UK resident settlor will have a tax liability for any chargeable gains realised during their lifetime, or in the tax year of their death. Gains will be taxed at their highest marginal rate. Top-slicing relief is available.

Settlor's liability to income tax - bare trust

A UK resident settlor will have a tax liability for any chargeable gains realised in a bare trust for their minor children only.

Trustees' liability to income tax - discretionary trust

If the settlor is survived by at least one life assured, the bond continues until it's cashed in by the trustees. For bond gains arising in years after the tax year of the settlor's death, the tax liability will fall on the trustees if they're resident in the UK. Gains will be taxed at the rate which applies to trusts (currently 50%).

If the bond is cashed in by the trustees but they're not resident in the UK, liability passes to any beneficiaries who are resident in the UK when they receive benefits under the trust. Any amounts received from the trustees will be viewed as coming first from gains, and beneficiaries will be taxed on these at their highest marginal rate. Top-slicing relief isn't available.

Trustees' liability to income tax - bare trust

The trustees won't have a tax liability on these trusts as it falls on the settlor or on the beneficiary.

Using the beneficiaries' tax rates - discretionary trust

When distributing the trust fund, trustees can either:

• cash in the bond, with tax liabilities falling on the settlor or the trustees - this allows the proceeds to be passed to the beneficiaries with no further tax liability

or

• pass the bond to the beneficiaries (as long as they're aged 18 or over). They'll then be liable for tax on any gains when the bond is cashed in, in full or in part

Gains will be taxed at the beneficiaries' highest marginal rate. Top-slicing relief is available.

Beneficiaries' liability to income tax - bare trust

The beneficiary of bare trusts will be taxable on any chargeable events arising, except where they are the minor children of the settlor, in which case the settlor is taxable.

Reporting gains

For chargeable event gains we're required (under the Overseas Insurers (Tax Representatives) Regulations 1999 and Amendment Regulation 2001) to provide the principal trustee with a chargeable event certificate. We only need to send a copy of the certificate to HM Revenue & Customs if the gain is greater than one half of the higher rate threshold. All policy gains must be reported to HM Revenue & Customs if required under self-assessment or if a tax liability arises.

Partial cash-ins/withdrawals

An investor can take payments from the bond either by cashing in complete policies or by partial withdrawal across all policies. There are no set rules about whether one method is more tax efficient than the other. So it's important to check the tax position of each method before taking the payment. Factors to consider include the length of time the bond has been in force, available 5% allowances and any cash-in charges.

Top-slicing

Top-slicing can be an important relief for an investor who isn't normally a higher or additional rate taxpayer. It's used to determine if there’s a higher or additional rate income tax liability on the gain. First, the whole gain is taxed at the individual's marginal rate, up to and including basic rate. Then, the total gain is divided by the number of complete years the bond has been in force, which determines the 'slice'. This is then added to other taxable income for the year to determine whether a further rate tax liability arises and, if so, to what extent.

Once any further tax liability on the slice has been calculated, it must then be multiplied by the number of years in force to determine the higher or additional rate liability on the whole gain. Offshore bonds have a distinct advantage over onshore bonds when it comes to top-slicing.

For onshore bonds the gain is only top-sliced back to the last chargeable event, except on final cash-in when the gain is top-sliced back to the start of the bond. But on an offshore bond the gain is always top-sliced back to the start of the bond. Potentially, this will mean the gain will be divided by a greater number of years, leading to a smaller slice.

Income-related tax allowances

If a taxable person (whether they're a settlor or beneficiary) is aged under 65, they have a personal allowance of £7,475 but this allowance will begin to be withdrawn if their income is over £100,000. If they're aged 65 or over they enjoy a higher personal allowance. But this enhanced allowance only applies if that person's income is below a certain amount. Care should be taken with the timings and amount of any cash-ins or withdrawals from a bond. Any amounts withdrawn within the cumulative 5% allowance don't affect allowances.

On the other hand, when a chargeable event arises, the full amount of the gain will be added to other income to determine the extent of the allowance for that tax year. The same is true of other income-related benefits such as child tax credit.

Always seek advice before making an investment choice.

Any reference to taxation is based on our understanding of current taxation law and HM Revenue & Customs practice in the UK as at November 2011, which may change.