Example: The trustees of the MacPherson Discretionary Will Trust
In 2020/21, the trustees of the MacPherson will trust surrender an offshore bond purchased in 2009 and realise a gain of £50,000. This is the sole investment of the trust. Tax payable would be as follows:
£1,000 @20% =
£49,000 @45% =
£50,000
So a gain of up to £1,000 could result in just a 20% tax charge for an offshore policy.
Top slicing relief can’t be used for this purpose.
In view of the 45% rate of tax which applies, planning opportunities arise for trustees to consider an assignment of the bond or of specific segments to beneficiaries prior to encashment. This is covered in the Tax Planning with UK Investment Bonds (/knowledge- literature/oracle-plus/taxation-uk-investment-bonds) article.
Top slicing relief
This is covered in detail in our Top Slicing Relief (/knowledge-literature/oracle-plus/top-slicing-relief- facts) article.
No top slicing relief is available for the annual gains that arise on ‘personal portfolio bond events’ (see later section).
Time apportionment relief
This now also applies to policies issued by UK insurers on or after 6 April 2013 and to existing policies issued by UK insurers, which are modified on or after that date.
The chargeable gain for an offshore policy is reduced for tax purposes if the beneficial owner was not UK resident throughout the policy period. The reduction does not apply where the policy is or was held by a non-UK resident trustee (S528 ITTOIA 2005).
The chargeable event gain is reduced by an appropriate fraction equal to A/B
A – the number of days on which the beneficial owner was not UK resident in the policy period.
B – the number of days in that period.
Accordingly, if the beneficial owner was non-UK resident for the whole period then the chargeable gain will be nil.
Please see the Tax Planning with Offshore Policies article (/knowledge-literature/knowledge- library/tax-planning-offshore) for more information.
Budget 2012 originally announced a consultation exercise on ‘reforming’ the time apportionment rules. As a result, changes effective from 6 April 2013 are:
- The relief will be available in the majority of cases to the person liable to tax in respect of the chargeable event gain. Previously the reduction was based on the residence history of the policyholder (the legal owner) rather than the beneficial owner.
- Where there are joint beneficial owners then the calculation of relief is based on each individual’s residence history applied to their share of the gain.
- Where there are previous owners, only the residence history of the person liable is to be taken into account.
- Under the statutory residence rules there is an anti-avoidance rule, under which chargeable event gains arising during a period of temporary non-residence will be treated as income arising in the year of return to the UK. Time apportionment relief and top slicing relief will be available in this situation.
Personal portfolio bonds (PPBs)
The chargeable event regime enables individual investors to postpone tax on underlying economic gains until the policy comes to an end.
The personal portfolio bond (PPB) rules provide a stricter regime where the property that determines the benefits under the policy is personal to the investor in a way that goes beyond the usual choices offered. One example of this is a bond where benefits are determined by reference to shares in the policyholder’s private trading company, which he has transferred to the insurer.
The PPB regime is therefore an anti-avoidance measure founded on the principle of an annual charge. The rules apply to a policy that is a PPB at the end of an ‘insurance year’, unless it is the ‘final insurance year’. The calculation made to determine whether a gain arises and, if so, its amount is in addition to any other calculation required under the chargeable event regime.
An insurance year begins on the day a policy is taken out and on the same date in subsequent years. It ends on the day before the anniversary of the start date and each subsequent year.
Example: personal portfolio bond penalties
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