Discretionary Trust and Insurance Policy question

Discretionary Trust and Insurance Policy question

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My parents and I are trustees of a Discretionary Trust in which the settlor (my now deceased grandmother) settled an insurance policy where the lives assured are the aforementioned trustees.

This was originally set up as part of IHT planning.

The policy was originally split into 20 segments to increase flexibility and I would like to know what the tax implications would be of transferring one/more of these segments out of the discretionary trust.

Would such a transfer be a taxable event (1) on the behalf of the trust, or (2) on behalf of the recipient?

I am aware that for the first 20 years 5% of the original investment value can be withdrawn as a de facto return of capital without tax implications and also that unused 5%s in previous years may be taken in future years on a roll up basis.

Many thanks for any replies.

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By KungFuKipper
21st May 2015 14:43

When was the trusts settled (was it a CLT?)

Are the trustees/beneficiaries UK res or not?

Talk to the life company but broadly:

...all the policies may be in the trust at outset, but at some point some may come out of the trust – because the trustees have assigned them to one of the beneficiaries. Where that happens, the assigned policies will be taxed as belonging to an individual, while those still in the trust will be taxed as policies in a trust.....

http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0004

(page 2 - assignment not for money or monies worth is not usually a chargeable event).

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By TrickyDicky
21st May 2015 14:59

That is an excellent and informative link and gives me a good starting point - thank you very much.

FYI, the trust was settled in August 1999 and it is an offshore bond. The trustees and beneficiaries are all UK resident.

My intention in assigning segments would be to utilise unused PA of my wife and mother on encashment. I am afraid I don't know what a CLT is.

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By KungFuKipper
21st May 2015 16:50

A Chargeable Lifetime Transfer. The insurance company might give guidance as well to avoid particularly nasty traps.

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By TrickyDicky
21st May 2015 17:00

Ah thank you - yes it would have been a CLT but the amount was within the nil rate band (there were reasons above and beyond IHT why the trust was used).You have been most helpful - thank you very much.

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