Investment Bond

Assignment of policies

What is an assignment?

An assignment is a transfer to another of a right, interest, or title to property, or an instrument of transfer. In other words it is a way of directing assets to others, for them to own. This mechanism allows the tax point of an investment bond to be deflected away from the original owner to a new owner.

The benefit of being able to assign, or change policy ownership, is that the transaction is not a chargeable event for the purposes of income tax, provided that it is a genuine gift and has not been assigned for money or money’s worth.

HMRC accepts assignments that are made as part of a divorce settlement are not for money or money's worth provided the assignment is mentioned in the court order.

It could be that the new owner pays tax at a lower rate, or better still, is a nil rate taxpayer. As the new owner they would have the authority to surrender the policy and pay tax on the chargeable gain, at their marginal rate of income tax.

It would be preferable, if the assignment was between a married couple or civil partners, for the surrender proceeds to not be paid into a joint bank account. This is to reinforce the fact that a transfer of beneficial interest has actually occurred.

There are no time constraints on the new owner to surrender the policy. If the policy surrender is deferred following assignment, additional years of top slicing relief could accumulate and potentially mitigate the tax consequence, when it is ultimately surrendered. Additionally, if dealing with an international policy, the timing aspect should focus on the appropriate tax year to surrender so that the policy gain can soak up what remains of the new policy owner’s personal allowance, starting rate band for savings income or basic rate tax band.

Trusts

The application of the assignment strategy is not just confined to individuals as it works just as well for trustees and usually can be tax beneficial. The tax deflection might be greater because trustees can, in some situations, avoid tax as high as 45% in favour of passing it off to the beneficiary at a lower rate.

All this is easily achieved by the use of a simple document transferring ownership from one party to another. When trustees complete an assignment, it is not a chargeable event for the purposes of income tax, because they are distributing rights under a trust and it is not an assignment for money or money’s worth. This is the focal point that drives assignments to be a tax-effective tool.

Where the beneficiary is under the age of 18, the trustees can execute a deed of appointment to create a bare trust.

Bare trusts

For bare (also known as "absolute") trusts, the beneficiaries are the taxable entity for gains arising on investment bonds.

This can result in a better position, from a tax perspective, because the bare trust beneficiaries could have sufficient personal allowance to soak up any international policy gains when chargeable gains are triggered.

But if the parents established the trust, because the donor is the parent of the beneficiary (who is a minor and is unmarried and not in a civil partnership), where chargeable gains exceed £100 in the tax year the gains will all be taxed on the parent.

This does not apply where grandparent(s) or other relative(s) are the donor(s) of the bare trust because the (minor) beneficiary will be the taxable entity when a chargeable event is triggered. This can help with school fees planning. However, donors of conventional bare trusts should be warned that:

  • beneficiaries can demand the trust fund once they reach the age of majority; and
  • the trust fund is vulnerable in the event of a divorce or if a beneficiary becomes bankrupt.

Discretionary trusts

Where an investment bond is held in a discretionary trust, a chargeable gain is taxed on the settlor if a chargeable event occurs while the settlor is alive and UK resident or it arises in the tax year in which the settlor dies.

If the settlor cannot be taxed because they died in a previous tax year or they are non-UK resident, the chargeable gain is assessed on UK trustees.

This means that trustees would pay 45% tax for an international policy gain or 25% tax for an onshore policy gain. (Although trustees pay basic rate tax on a maximum of £1,000 of trust income.)

Where the trustees are non-UK resident in the tax year in which the chargeable event occurs, the policy gain will become taxable on any UK resident beneficiary who receives benefit.

Where there are minors within the class of beneficiaries in a discretionary trust it can, in the right circumstances, play an important role with this particular aspect of tax planning. Where the trust is well-drafted, containing all the requisite powers and provisions, it is possible for the trustees to execute a simple power of appointment (very similar to an assignment) to create a bare trust.

This has the impact of effectively carving out trust benefits for minor beneficiaries in the form of specific policies to the required amount.

Arranging the assignment of investment bonds, within a trust or outside of it, provides a strategic planning benefit that delivers the ability to assign the tax away.

 

The information regarding taxation is based on our understanding of current legislation, law and HM Revenue & Customs practice as at March 2018. We recommend that investors take their own professional tax advice.

This briefing note has been prepared for professional advisers use only.

This briefing note can also be viewed as a PDF

 

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