An offshore single premium insurance bond can often be an attractive trustee investment. The bond d...
An offshore single premium insurance bond can often be an attractive trustee investment.
The bond does not produce income in the trustees' hands. This can help avoid UK trustees' liability to income tax, which might otherwise apply at up to 40%. Any income arising to the underlying bond investments will be assessed on the life company. The policyholder funds of an offshore life company will not suffer tax in the jurisdiction in which it is established. However, it should be remembered that irrecoverable withholding taxes are generally applied at source in the jurisdiction in which the income arises.
Any cash withdrawals from the insurance bond are capital. There is a potential risk that capital payments made to UK beneficiaries might be treated by HM Revenue & Customs (HMRC) as income in their hands. However, following the decision in Stevenson v Wishart, that should not happen unless, exceptionally, the terms of the trust dictate that payments out of capital may be made to supplement a beneficiary's income entitlement.
Any gains realised under the bond will be subject to the usual chargeable events tax regime. Gains will be assessed on the settlor, at marginal rate of tax, if he is alive and UK resident. Otherwise the gain will be assessed on UK resident trustees at 40%, or where the trustees are resident outside of the UK, on UK ordinarily resident beneficiaries who receive a benefit, again at their marginal rate.
It is of course well known that an advantage can often be achieved if UK resident trustees do not surrender bond segments themselves, which might result in a tax charge of 40% on any gain, but assign them to adult beneficiaries who are not high rate taxpayers. The beneficiaries may then surrender the segments and their tax liability will be less than that of the trustees, or settlor.
Following the changes to the taxation of UK dividends from the 1999/2000 tax year, investing in insurance bonds might also be advantageous to trustees of discretionary (non-interest in possession) trusts, who might otherwise be distributing UK dividend income. This is because the dividend tax credit can no longer be included in the tax pool, and so can't be passed on to beneficiaries. The introduction of an income band, currently £1,000, that is not subject to the dividend trust rate, currently 32.5%, has eased this problem to some extent.
The trustees can make cash withdrawals by taking part surrenders from the bond segments. This does not produce a chargeable event gain provided aggregate withdrawals do not exceed the 5% allowance. The allowance is 5% of the premium in the policy year in which it is paid and in the 19 subsequent policy years. The allowance is cumulative. So if it is not used fully in one year, any balance of that year's allowance is carried forward for future use.
Trustees should note that where there is a life tenant who is entitled only to income, an insurance bond is not an appropriate investment as it does not produce income.
Any withdrawals from the bond will not be subject to capital gains tax (CGT), as insurance bonds are generally exempt. Of course, that also means trustees will not be able to take advantage of their CGT annual exempt amount and other CGT reliefs, for example, rebasing when a life tenant of a trust dies.
For an existing trust, if the trustees are already invested in assets subject to CGT then reinvesting in an offshore insurance bond will result in a disposal for CGT purposes. UK resident trustees would be liable to CGT at 40% on any gain chargeable.
The main advantages of offshore bonds as trustee investments are: non-income producing; exempt from CGT; easy administration; only withholding taxes on policyholder funds; control over when tax payable and by whom. n
George Berg is legal technical manager at Norwich Union
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