Investment Bond

Question 1

Income tax treatment of assigning bond to Jane to encash then repurchasing

Answer 1

• if David adds June as life assured
• this is a chargeable event
• top slicing would not push David into additional rate
• but David will have to pay 20% income tax on the chargeable gain
• his income will be over £100k though which will reduce/remove his personal allowance
• if Jane owns the bond then top slicing means she will remain a basic rate tax payer
• though she will lose her personal allowance and have to pay some tax on her income
• once the bond is reinvested the base value will increase
• David and June will be able to take £12,500 per year tax deferred for up to 20 years

Question 2

Benefits of placing the bond in a DGT

Answer 2

• no IHT payable when setting up the trust
• as value is below their nil rate bands
• the discount provides an immediate reduction in IHT liability
• they are both in good health and relatively young
• so the discount will be high
• growth immediately outside the estate
• gift to trust free from IHT after 7 years
• immediately reduces the estate for RNRB purposes
• meets the objective of mitigating IHT on second death
• they can tax 5% tax deferred ‘income’ withdrawals
• bond is non income producing
• so reduces admin/no tax return
• Karen can be names as a potential beneficiary
• and David could name his grandchildren as a further beneficiary class
• so any future grandchildren can also benefit
• meets objective or Karen receiving benefit on second death

Question 3

Drawbacks of placing bond in DGT

Answer 3

• loss of access to capital
• decision can not be reversed
• costs/ admin associated with the trust
• if David dies first June could change the beneficiaries to include Joshua and her grandchildren
• they can not vary the income amount
• they are young and may live past 20 years