Introduction

Investment bonds are a popular trustee investment choice. Being a non-income producing investment means there is limited trustee tax reporting for the trustees. In addition the ability to assign segments to beneficiaries without triggering an immediate tax charge can offer a tax-efficient way of distributing trust assets.

The taxation of bonds doesn’t follow conventional trust tax rules, consequently advisers need to appreciate the implications for settlors, trustees and beneficiaries.

This module should take around 30 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 30 minutes can be claimed.

Outcomes

On completion of this module you should be able to:

  1. Explain who is assessable on bond gains in trust
  2. Illustrate the benefit of trustees assigning bond segments to beneficiaries
  3. Determine when the parental settlement rules may apply
Literature

Learning material

This module explains who is assessable for any tax arising from a chargeable gain on a bond in trust. It highlights the difference in treatment of gains during and after the settlor’s life, when gains are taxed on the beneficiary and how to report gains to HMRC.

CPD minutes: 30

Read the Taxation of bonds in trust guide

Post learning assessment

Question 1

Bryan created a discretionary trust and the trust holds an offshore bond. The trustees (Bryan and his brother George) have surrendered the bond and paid the proceeds to Bryan’s grandchildren, Lorna and Florence. Both live in London. Who is assessable for the tax on the bond gain?

  1. Bryan – as the settlor
  2. There is no UK tax payable on offshore bonds
  3. The trustees
  4. Lorna and Florence – as UK-based beneficiaries

Question 2

If the trustees of a discretionary trust assign bond segments to adult beneficiaries, which are subsequently encashed – how are these taxed?

  1. Taxed as the beneficiary’s income at their own marginal rate
  2. Taxed as trustee income at 45%
  3. Taxed against the settlor at their marginal rate
  4. Taxed as beneficiary’s income at settlor’s marginal rate

Question 3

In 2014, Gwen and Steve set up an absolute trust for the benefit of their son James, aged 10. The trust holds an offshore bond. The bond is surrendered and there is chargeable gain. Which of the following statements is correct?

  1. The trustees will be taxed on the gain at 45%
  2. James will be taxed on the gain at his marginal rates
  3. The gain will be split equally and taxed upon Steve and Gwen at their marginal rates
  4. James will be taxed on the gain but only when he attains 18

Check your answers

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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.