tax on life insurance bonds held in a trust

Will trust containing life bonds. Units cancelled on second death. Chargeable event in name or dec'd

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The sole assets of the trust are three life insurance bonds with  total value of £93k. The trust has never been registered thus far – I believe when it was created this wasn’t a legal requirement. I hope the low value relative to the IHT thresholds means the 10 year declarations weren’t necessary.

The trust was created as a discretionary trust in 2001 in my stepfather's will - though with my mother as first trustee and the desired lifetime beneficiary. In 2002 during my divorce proceedings my Sister and I renounced our rights to benefit from the trust during our mother’s lifetime. In 2003 our mother unilaterally directed regular payments from the bonds to herself without needing the other trustees signatures. She continued to receive these monthly payments for the rest of her life.

Following my mother's death, I have been sent chargeable event certificates for the three bonds. They are in the name of my mother not my sister and myself as the other trustees.

On the basis that my mother had enjoyed a life interest in the trust / bonds and had effectively an interest in possession, I declared them to HMRC on form IHT400 and IHT 418 asking that tax on the transfer of the trust should be paid. However because the estate benefited from the residential nil band and the transfer of her husband's remaining nil band, the bonds did not trigger an inheritance tax payment.

What needs clarifying is:

  1. Can the chargeable events now be ignored by the trust because they are covered by the probate application as part of mum’s estate?
  2. Do the chargeable events need to be declared on a tax return on behalf of my mother – where top slicing would mean no tax over and above the notional 20% would be due?
  3. Do the chargeable events need to be declared in a trust tax return where they could incur a trustee tax of 45% minus the 20% notionally paid?
  4. If the trust has to pay trustee tax, then how does it frank the payment so the tax can be reclaimed by the beneficiaries? I am a french tax resident and my sister is a non tax payer.

Replies (4)

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By Tax Dragon
18th Apr 2018 21:06

You have joined here today, may be you do not know how this site works. Are you expecting an answer or a fee quote?

Anyway it's 3 - trust tax at 45%. I'm not entirely convinced by the past treatment but possibly no harm came of that.

Thanks (1)
Replying to Tax Dragon:
By JBSelf
19th Apr 2018 10:03

Yes I was hoping for answers. Thanks for yours.

If someone knows how the trust can issue a tax credit to the beneficiaries so it can be reclaimed or some other way to mitigate the tax then a fee quote could be interesting.

Otherwise the beneficiaries end up paying a 45% tax rate for which they are normally not liable and this seems neither just nor reasonable.

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By Vaughan Blake1
19th Apr 2018 10:41

I suspect that a trust expert knows the answer! Why not set up a meeting with one?

Thanks (1)
Replying to Vaughan Blake1:
By JBSelf
19th Apr 2018 11:47

Thanks. I'm sure intelligent minds have already applied themselves to this type of situation.

I just need to find one who can offer a positive outcome. Is there someone you would suggest?

Thanks (0)