Julia Peake picks three of the topical technical questions received recently by the Nucleus technical team.
Q1. When a married couple makes a gift to their child and one of them dies within seven years of making the gift, how is this calculated from an IHT perspective?
A1. The devil is in the detail, and it will be dependent on how the gift is made and where the money comes from in determining the loss of value to the estate.
On balance, when a joint gift, a potentially exempt transfer (PET) from the parents to the child, is made from a joint bank account, which both parties contribute equally to it, then mostly likely the gift would be seen by HMRC to be made on a 50/50% basis.
However, IHT is not a “joint tax” for married couples. If the gift were for example £250,000 total (ignoring annual exemptions, etc), there would be two PETs: £125,000 each. If Mr dies 5 years after making the gift, this PET will use up part of his NRB according to the order of gifting.
It is conceivable that the total gift paid from a joint account would be from one person rather than split as each person has full access to the value of the joint account but this will depend very much on the facts of the case and on their contribution to the account please see:IHTM15042 – The extent of the share (England, Wales and Northern Ireland): Joint money accounts – HMRC internal manual – GOV.UK
It might be worth a letter of intent constructed about the nature, intention and terms of the gift and legal and tax advice sought on this matter in the case of death in the next 7 years.
Q2. I’ve heard that if a current policy owner of an investment bond is taking withdrawals, then assigns the bond to a new policy owner in the same tax year and they surrender this that the chargeable event is taxed on both rather than the new owner. Could you explain this as well as what policy rights the new oner has are please?
A2. If withdrawals have been taken from the bond and then subsequent assignment a surrender happens tax related transaction charges can apply. This is where some or all of the gain can fall on the owner before the assignment if withdrawals are taken before the assignment and in the same policy and tax year as a subsequent surrender/encashment. To be absolutely sure this doesn’t happen, you would delay the surrender/further withdrawal until after tax year following the end of the current policy year. See IPTM7625 – Part surrenders and assignments: transaction- related calculations: part surrender or assignment events – HMRC internal manual – GOV.UK. If no withdrawals have been taken, then you don’t need to worry about this.
Additionally, when looking at the subsequent surrender of the policy, the new owner will take on the history of the bond, it isn’t rebased at assignment/transfer of ownership. So full number of years since inception for top slicing purposes (for a surrender/final chargeable event), any built up tax deferred allowance etc. The Chargeable Event Gain (CEG) calculation on surrender is based on the original investment amount, and any top ups, and will include any withdrawals taken from the bond/segments prior to the assignment.
However, please remember that assignment by way of gift would be a potentially exempt transfer between individuals unless this is covered by the spousal exemption and care should be given that this is an absolute gift.
Q3. If the client surrenders their onshore investment bond and a chargeable event occurs what tax rates and regime are used if the client lives in Scotland?
A3. Scottish rates of income tax apply to earned income only . Chargeable event gains from bonds are savings income and so UK rates and bands are used.
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