T is relief can help to spread the profi t or gain over the life of the investment and mitigate higher rate taxes in some cases. However, this relief is not available to trustees when realising a CEG.
Income distribution vs capital distribution While any tax actually paid by the trustees will form part of the trust’s tax pool and be available to frank future income distributions to benefi ciaries, a problem arises if the trust does not have any income available to distribute. Despite the CEG being deemed income for tax pur-
poses it is, as a matter of fact and trust law, capital in nature. Therefore, the distribution of the investment bond funds to the benefi ciaries is a capital distribution, not an income distribution. As a result, there will be no income tax credit attached to the distribution which the benefi ciary could have potentially recovered depending on their personal circumstances. Where the trustees would be liable to tax on the CEG,
it could be more tax effi cient for the bond/policy to be appointed absolutely to the beneficiary prior to any encashment, but this will always depend on the specifi c circumstances of each case. T is is because it allows the benefi ciary to:
■ Encash the bond in segments and at times that are most tax effi cient for their personal circumstances.
■ Make use of Top Slicing Relief which can negate any higher rate tax payable on the CEG.
■ Potentially make use of the beneficiary’s personal allowance, personal savings allowance and lower income tax rates which the trustees do not have.
If the settlor would be liable to tax on the CEG and not
the trustees, we would suggest comparing the settlor’s and benefi ciary’s personal tax positions to assess if it is more tax effi cient for the trust or benefi ciary to encash the bond/ policy before taking any action.
Take professional tax advice T ere are of course many factors to consider when manag- ing a trust’s investments but given the potential loss of tax when trustees encash investment bonds and non-qualify- ing life insurance policies, it is always benefi cial to take tax advice before undertaking such an exercise. At MHA, we understand trustees cannot let tax control
all decisions and, in some cases, it may be appropriate for them to encash the investment even if this is not the most tax effi cient option. However, if appointment to the benefi ciary prior to en-
cashment is appropriate and more tax effi cient it is better to know this in advance, as there is no way to go back once the encashment has occurred.
To discuss any of the issues raised in this article, contact Katriona McEwan on 01234 268761.
For questions on other personal tax matters, contact your usual MHA adviser, visit
www.mha.co.uk or scan the QR code to fi nd your local offi ce.
The above is not intended to be construed as fi nancial advice. Should you wish to obtain fi nancial advice in respect of any investments you hold, contact
www.mha.co.uk/services/wealth
9
FINANCE
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