Neil Macleod Senior Technical Manager, M&G, points out the benefits and the pitfalls when transferring ownership of a bond by deed of assignment.
One of the useful features of an investment bond is the ability to transfer ownership by using a “v”. An assignment can be made in respect of the entire policy or individual segments and changes the legal ownership from the “assignor” (the current owner) to the “assignee” (the new owner ). They can be used for life policies and capital redemption policies held in sole or joint names, to one or more individuals and/or entities, such as trusts or companies. Assignment can provide great tax planning opportunities but it’s important to understand the implications of an assignment and some of the pitfalls to watch out for.
What are the tax implications of an assignment by way of gift between individuals?
Assignments are either made by making an outright (no strings attached) gift or for consideration. If assigned by outright gift it won’t trigger a chargeable event for income tax purposes but the assignor will be making a Potentially Exempt Transfer (PET) for IHT purposes. If the assignment is for consideration it might trigger a chargeable event for income tax purposes depending on the nature of the consideration.
Regardless of whether the assignment is by way of gift or for consideration, the assignee inherits any available tax deferred allowance and for the purposes of calculating gains any premiums paid to the policy, all previous withdrawals and previous excess gains will be factored into chargeable gain calculations. Top slicing relief will also be based on the policy history and not just the new owner’s period of ownership.
What is an assignment for “Money or Money’s Worth”?
The term “money or money’s worth” means the assignment is made in exchange for cash or another asset which has value. There are two specific exceptions to this which would not cause a chargeable event to occur:
- between spouses or civil partners who are living together
- by way of security for, or discharge of debt e.g. a mortgage
Where the assignment is made for “money or money’s worth” a chargeable event arises and the assignor will be assessed on any gain.
Can you assign a between spouses?
An assignment of all or part of a bond between spouses or civil partners living together is disregarded for the purposes of the chargeable event legislation (although see divorce section below). This means that it doesn’t (normally) give rise to a chargeable event. Provided the assignment is an outright gift and there’s no intention to retain any benefit from the surrender proceeds there is no issue. However, if the assignor subsequently benefits from the policy e.g. reinvesting the proceeds in their own name, the settlements legislation will apply. The settlements legislation treats the assignor retaining the benefit in the same way as a settlor of a trust and they are assessed on the chargeable gain.
How are assignments treated on divorce?
Where there is an assignment by one spouse or civil partner to the other under a divorce or dissolution settlement, HMRC takes the view that the assignment it’s not for money or money’s worth where there is a court order ratifying the transfer of assets. In the absence of a court order the assignment will give rise to a chargeable event.
Can you assign to a minor child?
In most parts of the UK, a minor child is someone who is under the age of 18 (the age of majority is 16 in Scotland). Assignments to a minor should be avoided as it creates unnecessary problems. The insurance company would not be able to transact with the new owner due to the minor not having legal capacity to contract or give valid receipt for any surrender proceeds.
Where the intention is to make a gift of a policy to a minor a simple alternative is to make use of a bare trust where the trustees will act as legal owners with beneficiary holding the beneficial interest.
If transferring bond segments out of a discretionary trust with the aim of making use of a minor beneficiary’s allowances on encashment, a “deed of appointment” should be used to appoint segments absolutely in their favour. The trustees continue as legal owners but on encashment of the appointed segments, the gain falls on the beneficiary (unless the settlor of the trust is the minor child’s parent in which case the gain is assessed on the parent).
Can you assign a bond into a trust?
It’s normally possible to assign a bond into a new or existing gift trust or probate trust however it can be more complicated when dealing with other types of trusts. Many discounted gift trusts and loan trusts need to be set up using a cash sum rather than an existing asset such as a bond so the trust provisions should be checked to see if this is an option. It may be possible to assign bonds into these types of trust once the trust is set up as a gift to the trust fund, but the trust deed should be checked to see whether this is possible.
What are the tax implications of assigning into a trust?
The owner(s) of the bond prior to the assignment is the settlor(s) of the trust for tax purposes. An assignment by way of gift into a trust would not normally trigger a chargeable event but it is a transfer for IHT purposes. If no gifting exemption applies, an assignment into an absolute trust would be a potentially exempt transfer and where a non-bare trust is used e.g. a discretionary trust, a chargeable lifetime transfer. The value of the gift would be the open market value of the policy at the date of the assignment.
What are the tax implications of assigning segments to a trust beneficiary?
An assignment of segments from the trustees to a beneficiary will not generally give rise to a chargeable event. This can be particularly useful where encashing the bond or part of the bond within the trust would give rise to the trustee rate of tax. If assigned, any subsequent chargeable gains are then assessed on the beneficiary. Depending on the beneficiaries circumstances, they could make use of top slicing relief and the number of years for calculating the slice will be based on the policy history as opposed to the assignee’s ownership period. If the trust is a relevant property trust e.g. discretionary, it should also be checked whether an IHT exit charge will apply to the distribution of trust capital.
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