A guide to investment for trustees 14 Taxation of life assurance products – investment bonds Investment bonds are taxed under the chargeable events regime. This unique taxation regime means all gains are assessed to income tax and not capital gains tax. Additionally, the tax charge will vary depending on the circumstances of the investment. For example, where the settlor of a discretionary or IIP trust is alive and UK resident, any chargeable event is assessed on them. Funds can be switched without gains being realised and when the trustees decide to distribute some of the trust assets, they can consider the best way from a tax perspective to realise the assets. The bond is normally established in a series of policies and this would enable the trustees to, for example, assign some of the policies to a beneficiary (aged over 18) so that the beneficiary can realise the gains and incur tax at their own rate and not that of the settlors’ or trustees’ if the settlors are dead. As a non-income producing asset, year on year, there will be no liability arising to income tax which means the £100 rule mentioned on page 11 is avoided along with potential tax reporting until a chargeable event gain occurs. At a glance * Where the trust is created by the parent of the unmarried minor beneficiary, any income of £100 or more will be deemed to be taxed on the parent even if they derive no benefit from the trust and the beneficiary’s personal allowance is unused. However, for CGT, the full allowance is available and any gains are assessed on the beneficiary. Although life assurance policies are normally taxed on the settlor of a trust, HMRC has clarified that any chargeable event gains under a bare trust will be assessed on the minor beneficiary and not the settlor. The parental settlement rules for income still apply. Type of trust beneficiary Income tax Capital gains tax Inheritance tax Bare * Generally on beneficiary * 10% (18%) or 20% (28%) on beneficiary (surcharge applies on property gains) Part of the beneficiary’s estate Interest in possession (IIP) 8.75% on dividends 20% on other savings income and non- savings income 20% (28% for property gains) on trustees Not part of beneficiary’s estate unless created on death or if by a trust created before 22 March 2006 Discretionary First £1,000 taxed as per IIP then 39.35% on dividends and 45% on other income received. 20% (28% for property gains) on trustees Not part of beneficiary’s estate When the trustee is liable for the tax on encashment of a life assurance policy, the trustee rate of tax is 45%.