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Readers’ forum: Insurance bond

11 May 2021
Issue: 4791 / Categories: Forum & Feedback
Inheritance tax on bonds in a trust.

I am dealing with a discretionary trust which holds an investment in an insurance bond. A partial withdrawal has been made and a chargeable event gain has arisen. As the settlor is still alive it is my understanding that the chargeable event gain will be taxed on the settlor not on the trustees.

The amount withdrawn has been paid to a beneficiary (not the settlor) which has raised a number of questions:

  • Is the beneficiary liable to income tax on the chargeable event gain? I believe not since it has been taxed on the settlor.
  • Does IHTA 1984 s 65(5)(b) mean that no inheritance tax liability can arise since an income tax liability has already arisen in the hands of the settlor so that there is no exit charge?
  • If the point above is correct what happens at the next ten-year anniversary?...

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