Investment Bonds – how assignments can help with tax and estate planning
Introduction
This briefing explains what an assignment is and how an assignment of a life assurance or capital redemption bond can assist clients who have estate and tax planning needs.
Core considerations
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An assignment of a bond changes the ownership of the bond.
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Assigning the bond by way of a gift does not trigger a chargeable event.
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The new owner must be at least 18 years of age in England Wales, or 16 in Scotland.
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An assignment to a lower tax paying individual will reduce income tax on future chargeable event gains. Care should be taken regarding HMRCs conditional gifting rules.
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Assignment by trustees or executors to a beneficiary may result in lower tax being paid on chargeable event gain.
Contents
- What is an assignment?
- Is an assignment a chargeable event?
- Assignments from one individual to another
- Tax and estate planning with bond assignments
- Assignments from a trustee or executors to a beneficiary
What is an assignment?
An assignment is a way of transferring the legal or beneficial ownership of a bond from one party to another. A bond is made up of individual policies, otherwise referred to as segments. It is possible to assign one or more segments without assigning all of them.
An assignment is evidenced by the completion of an assignment deed. It will show when the assignment took place and who the bondholder is at the time of the assignment (‘the assignor’) and who the bond or segments within the bond are being assigned to (‘the assignee’).
Most bond providers’ Terms and Conditions will include a clause which would allow a bond to be assigned. These may also include some conditions which must be considered before the bond is assigned. For example, the assignee must be a UK resident or at least 18 years.
Is an assignment a chargeable event?
It is common for a bond to be assigned by way of a gift. An example of this is where a parent gifts their bond to their child, or into trust. In these circumstances the assignment is not a chargeable event.
An assignment can be a chargeable event where the transfer is in consideration for something in return. An example of this is where a bond is sold, in return for a cash value; or where the assignor receives something in exchange for the bond.
Assignments from one individual to another
It is common for a bond to be assigned to another individual for a gift and/or tax and estate planning purposes.
A bond can be assigned to an individual provided the assignee is 18 years of age in England and Wales, or 16 in Scotland. It is not possible to assign a bond to a minor because they do not have the capacity to contract.
Where the assignor is gifting the bond to an individual, it will be a Potentially Exempt Transfer (PET) for Inheritance Tax (IHT) purposes, unless it is an exempt gift, and will generally fall outside of the assignor’s estate after 7 years.
A gift can be exempt where the assignor and the assignee are married or in a civil partnership.
There are no income tax or capital gains tax considerations when a bond is assigned as a gift, except where it has previously been sold.
Tax and estate planning with bond assignments
There are several planning reasons why a bond may be assigned to an individual. These can include:
(a) To minimise income tax on surrender
Following an assignment any gains arising on subsequent chargeable events will be assessed on the assignee and their tax position at the time of the chargeable event. If they are a lower rate taxpayer, less tax is likely on the chargeable event.
HMRC have conditional gifting rules which ensure any transfer, such as between spouses or civil partners, is a genuine gift rather than contrived tax planning. Additionally, if the encashment proceeds are reinvested back into a bond in name of the original bond owner, this would fall under the associated operations rules.
(b) To assist with university fees
A bond can be assigned to a child or grandchild, provided they are at least 18 years of age (16 in Scotland), to fund their university fees or to provide them with the financial assistance they need through university.
The benefit of this is that the child or grandchild can utilise any available personal tax allowances which may be available. Bond gains can use some or all the Personal Allowance, Starting Rate for Savings, Personal Savings Allowance, depending on the level of income of the child or grandchild. They can also benefit from top slicing relief which can help reduce any taxable gain.
A segmented bond provides the bondholder with some flexibility. They can assign one or more segments each tax year whilst the child or grandchild is at university. The benefit is that they can control when the assignment happens and when the child or grandchild receives the segments.
If the assignments are planned and timed so that one or more segments are assigned in different tax years, the child or grandchild could use their tax allowances, each tax year whilst they are at university, and maximise the use of these which could ordinarily remain unused.
(c) For estate and wealth planning
An assignment can help reduce the value of an individual’s estate, for IHT purposes. Where the assignment is to another individual or into an absolute/bare trust, this will be a PET and will generally fall outside of the estate after 7 years. IHT exemptions are also available which can be used to reduce the value of the original gift.
If the assignment is into a relevant property trust, such as a discretionary trust, the gift is a Chargeable Lifetime Transfer (CLT). Where the cumulative total of CLT’s in the previous 7 years is below the nil rate band, there is no IHT immediately due. However, if the cumulative total is more than the nil rate band, there will be an immediate charge to IHT on the excess. This is known as an entry charge.
Assignment from trustee or executors to a beneficiary
Where a bond is owned by trustees or executors, they are holding it for the benefit of the beneficiaries. To distribute the trust assets or the assets of the estate, for example the bond, to the beneficiary, they have two options:
- Trustees encash the bond themselves and distribute the proceeds from the bond to the beneficiaries.
If this happens when the settlor of the trust is still alive or in the tax year of their death any chargeable event gain would be treated as part of the settlor’s income and they will have to pay any income tax due. The settlor may recover the tax from the trustees
If chargeable event gains arise in a tax year after the settlor’s death, the gains will be assessed on the Trustees.
For information on how Executors are taxed on bond gains, please see our briefing.
- Trustees can assign the bond or one or more segments to one or more beneficiaries, provided the beneficiary is at least 18 years of age (16 in Scotland).
The beneficiary has the option of retaining ownership of the bond until they wish to encash it; or they could encash the bond immediately. Any future chargeable event gain will be assessable on the beneficiary when they encash it.
An assignment by trustees or executors to a beneficiary may result in lower tax being paid on any future chargeable event gain.