Assignment or Appointment

One of the advantages of investment bonds is the ability to move the tax point away from the original owner to another. This strategic planning benefit can be used with investment bonds held individually or within a trust and coupled with an effective exit strategy can help reduce the tax payable on a chargeable gain.

Individually held bonds

An assignment is a process whereby one person, the assignor, transfers assets to another person, the assignee, who becomes the new owner of the assets.

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.

Where an assignment is made as part of a divorce settlement HMRC will only treat the assignment as a gift if it is specifically mentioned in the court order. If it is not mentioned then the assignment would be treated as a gift for money or money’s worth, making it a chargeable event.

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

Remember, if the new owner is an individual the assignment would be a potentially exempt transfer for inheritance tax purposes, unless it is covered by any available exemptions. If the new owner is a trust the assignment would either be a potentially exempt transfer or a chargeable lifetime transfer, depending on whether the trust is absolute or discretionary.

If the assignment is between a married couple or civil partners and the proceeds benefit both of the original owners and not just the new owner, HMRC might look at the overall transaction rather than the individual steps and apply tax accordingly.

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

Investment bonds held by trustees

Even where an investment bond is held under a trust the trustees still have the ability to assign ownership from themselves to a beneficiary, rather than surrendering the bond within the trust and distributing cash.

Where an investment bond is held in a discretionary trust, any chargeable gain is assessed on the settlor if the chargeable event occurs while the settlor is alive at any point in the tax year and is UK resident.

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 a UK trust. This means that a UK trust could potentially pay up to 45% tax on an offshore bond gain or 25% on an onshore bond gain.

Moving the tax point to a beneficiary can result in a better tax position because that beneficiary could potentially be a lower taxpayer, have sufficient personal allowances to soak up any gains and be entitled to use top-slicing relief.

When dealing with a discretionary trust the trustees have two options; they can either assign legal ownership to the beneficiary for them to hold individually or use a deed of appointment to create a bare trust.

Where the beneficiary is over 18 and so can legally own an investment bond, the trustees can complete an assignment. As the trustees are distributing rights under the trust it is not a chargeable event for the purposes of income tax but there could potentially be an inheritance tax exit charge.

The beneficiary then becomes the legal owner of the bond meaning that any chargeable gains would be taxed at their marginal rate of tax.

Where there are minor beneficiaries who cannot legally own an investment bond, instead of assigning the bond the trustees can execute a deed of appointment to create a bare trust. The trustees remain the owners of the bond but the impact of the appointment is to effectively carve out the policies for the minor beneficiaries. Any chargeable gain under a bare trust is assessed on the beneficiary, so this moves the tax point to the minor beneficiary.

However, remember that if the parents of a minor beneficiary establish a trust, any distribution to that minor beneficiary (whilst unmarried or in a civil partnership) which results in a chargeable gain exceeding £100 in the tax year will all be taxed on the parent.

We say

• The ability to assign or appointinvestment bonds to newowners can be a valuabletax planning tool.
• The assignment or appointment is usually not achargeable event which gives owners the opportunityto plan suitable exit strategies.
• The ability to move the tax point allows anysubsequent chargeable gains to be assessedon a lower or non-taxpayer.