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Investment Bond In Trust

If it makes any difference to the answer, all relevant parties are UK resident and domiciled, and the Insurance Company trades in the UK.

The settlor is still alive but I don't know whether he can benefit from the trust or not.

If they are income distributions, what rate of tax should the trustees deduct?

Thanks
Tony Pritchard

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06th Nov 2005 17:09

Capital
The bond is a non-income-producing asset, and the 5% withdrawals (although commonly referred to as "income") are withdrawals of capital. Even if more than 5% were withdrawn, the chargeable excess would still be capital in the hands of the trustees (notwithstanding that the excess is charged to income tax).

However, these capital sums may under some circumstances be taxed as income when distributed to beneficiaries. If the beneficiaries have only income rights, the distribution will be taxed as income per Brodie's Trustees. If, on the other hand, the trustees are empowered to advance capital as well as/instead of income, the distributions will not be taxed as income (Stevenson v Wishart). Check your trust instrument carefully.

Incidentally, even if the settlor cannot benefit, he is the assessable person if a chargeable event occurs (admittedly he has a right of recovery from the trustees).

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By taxinfo
07th Nov 2005 12:44

need to know more
You need to find out exactly what this trust is for and the reason it was set up in the first place.

For example, from what you say, this could be a "loan trust arrangement". Under this scheme the settlor makes a loan to the trust with which it (the trust) then buys an investment, i.e. typically an investment bond.

The trust then takes the annual 5% "tax free" withdtrawals and uses this money to make loan repayments to the settlor (which the settlor spends/gives away or similar so it doesn't find it's way back into his IHT taxable estate).

Objective - the settlor manages to move capital away from his estate into the trust to that any growth on the investment, whilst in trust, is outside IHT charge on the settlor's death. The trust assets are bequeathed away on the settlor's death.

Hope this helps.

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By Bluffer
13th Nov 2005 18:14

Thank you Andrew and Gareth
Very useful comments.

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