Chargeable Events on Bonds Held in Trusts
In this article, we examine how an investment bond in trust is taxed when a chargeable gain occurs following a chargeable event. This is particularly relevant to the CII R03, R06, AF1 and AF5 exams.
This article is correct as at 8 July 2025 and is relevant to examinable tax year 2024/25.
The key question for the trustees is: who is liable for the tax?
Was the bond subject to a bare trust?
Yes: The gains are taxed on the beneficiary (although the parental settlement rules will apply for beneficiaries under the age of 18 where the bare trust was established by the parent/s)
Was the settlor alive and UK resident in the tax year of the chargeable event?
Yes: The gain is assessed on the settlor and top slicing can be used.
- Any Income Tax paid can be recovered from the trustees.
Was the settlor deceased or non-UK resident?
Yes: The trustees are responsible for the tax at the rates applicable to trusts.
If the trustees are non-UK resident then a UK beneficiary benefiting from the gain will be liable. In both these scenarios neither trustees nor beneficiaries can use top slicing.
Assigning to beneficiaries
The trustees can assign the investment bond to a beneficiary that is over the age of 18 and upon encashment their Income Tax rates will apply and top slicing relief will be available.
Was the trust and bond set up before 17 March 1998 and did the settlor die before that date?
Yes: The gain escapes tax due to the “dead settlor” rule, assuming the bond has not been topped up or been altered in any way since then.
Tax Rates and Allowances
If trustees are liable:
If the gain is less than £500 (assuming the settlor has not created other trusts) there will be no tax to pay. If the settlor has created other trusts the amount is either £500 divided by the number of trusts created or £100 whichever is the higher figure.
If the gain is more than £500 it will be taxed at the trustee’s rate of 45% (or 25% for onshore bonds due to the 20% basic rate credit), Remember there is no top slicing in this scenario.
If the settlor is liable and it is an onshore bond:
- Basic rate taxpayers: No further tax (due to the 20% tax credit).
- Higher rate taxpayers: Liable for an additional 20%.
- Additional rate taxpayers: Liable for an additional 25%.
Summary
Investment bonds held in trust are taxed in a different way than those not held under trust. During the settlor’s lifetime, the liability will fall on them. If the settlor has died or is not UK resident in the year of assessment then the trustees will be liable.
Proper planning and documentation are key to ensuring tax efficiency.
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