Tax Implications of Assigning Investment Bonds

In this article, we take a look at the assignment of onshore investment bonds, focusing in particular on the tax implications. This article is particularly relevant to the CII R01, R02, R03, R06, AF1, AF4, and AF5 exams.

This article is correct as at 28 February 2024.

Assigning onshore investment bonds

Assigning an onshore investment bond by way of gift (as opposed to for money or money’s worth) is not a chargeable event. It does not create a chargeable gain for income tax purposes at the time of the assignment, and any future chargeable gains will be assessed on the assignee (the recipient of the bond). There may be inheritance tax (IHT) implications, but this will depend on the nature of the relationship between the assignor and the assignee, and, in certain cases, as we will see, what the bond will be used for.

This type of tax planning is typically undertaken between:

• spouses and civil partners;
• parents and children;
• grandparents and grandchildren.

Spouses and civil partners

A partner liable to income tax at the higher or additional rates may decide to assign their investment bond to a basic-rate or non-tax paying partner prior to encashment.

On encashment, any gain would be liable to income tax at the recipient’s marginal rate which, for onshore investment bonds, may result in no further tax being payable, providing the top-sliced gain falls within the personal allowance, starting rate for savings income, personal savings allowance or basic rate tax band. The downside, of course, is that the tax paid within the fund cannot be reclaimed where the recipient is a non-taxpayer.

Any gain will still benefit from top-slicing relief back to the original date of investment, rather than just to the date of the assignment. For example, if a bond is assigned to a new owner after five years and encashed five years later, top-slicing relief is available to the new owner for the lifetime of the bond – i.e. for the full ten years, rather than just the five years during which they have owned it.

To be effective for tax purposes, the assignment must be outright and unconditional. This means, for example, the original owner could not instruct their partner to give the proceeds of the bond to them following encashment.

An assignment between spouses or civil partners is exempt for IHT purposes, provided they are UK-domiciled or deemed UK-domiciled.

Parents and children

Assigning an investment bond to a child, in full or in part, can be a tax-efficient way of funding university fees.

Assuming the ‘child’ is over 18, the parental settlement rules will not apply and the income tax liability will fall on the child, who, if in full-time education, is likely to be a basic-rate taxpayer at most.

The IHT position is slightly different than assignments between spouses and civil partners, but still effective. Under the gift for the maintenance of family exemption, a parent can make an exempt gift of capital to a child over the age of 18 for their maintenance, education or training, providing the child is still in full-time education. In this instance, full-time education includes university (even if, for example, the child has a part-time job while they study).

Grandparents and grandchildren

Here, the income tax position is the same for the grandchild as children over 18, but the IHT position is somewhat different. This is because the gift for the maintenance of family exemption does not extend to grandchildren.

Assigning an investment bond to a grandchild outright is, therefore, a potentially exempt transfer (PET). The PET remains in the estate of the grandparent for seven years. If the grandparent dies, then IHT is potentially payable by the grandchild on the value of the PET that exceeds the grandparent’s available nil rate band. Consideration should therefore be given to a gift inter vivos policy to protect the grandchild. Taper relief will be available if death occurs after the first three years.  A seven-year level term assurance may also be appropriate to protect the grandparent’s nil rate band.

However, if the grandparent survives seven years, the assignment will have been effective at reducing the value of their estate for IHT purposes.

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