INVESTMENT BOND FACTSHEET 9 SINGLE AND JOINT INVESTMENT BONDS

Transcription

1 INVESTMENT BOND FACTSHEET 9 SINGLE AND JOINT INVESTMENT BONDS Life insurance investment bonds and capital redemption bonds can both be established with single or joint owners. For life insurance investment bonds only, a bond with either single or joint owners can be established with a single life assured, joint lives assured on a first death or last survivor basis or multiple lives assured. Single or joint owners Life insurance investment bonds and capital redemption bonds can normally be set up with just one owner, or with two or more owners. The owner is usually referred to in the policy documents as the investor, but a variety of terms are used for this role. You may see the owner referred to as the plan holder, the policy owner, the policy holder, the assured or the grantee. If joint owners are investing on their own behalf, they are automatically treated as joint tenants, with each of them treated as holding equal shares in the value of the investment bond. If one owner dies, the other automatically becomes the sole owner of the whole investment bond by right of survivorship. In this situation, the deceased s share of the value of the investment bond cannot be disposed of under the terms of his or her will, or under the intestacy rules. It is not normally considered appropriate for investment bonds to be held on a tenants in common basis, as this leads to complex legal consequences following from the fact that life policies (including investment bonds) are legally things in action, also known as choses in action rather than real property. Trustee investments If trustees are investing trust assets, then all the trustees collectively must apply for an investment bond as the legal owners. The bond is held as a trust asset for the benefit of the trust beneficiaries, subject to the terms of the trust. Lives assured This section is not relevant to capital redemption bonds. In many cases, the bond owner(s) can control the timing of a taxable chargeable event in respect of an investment bond. However, the timing of a death claim is not in the control of the bond owners, but is a taxable chargeable event as it automatically brings a bond to an end. In light of this, most providers offer a range of lives assured options which should meet the needs of different investors. If there is only one life assured, the death claim value is paid out on the death of that individual, bringing the bond to an end. If a bond is established with joint lives assured on a first death basis, the death claim value is paid out on the death of the first of the lives assured to die, bringing the bond to an end even though the other life assured remains alive. If a bond is established with joint lives assured on a second death basis, the death claim value is not paid out until the death of the second of the two lives assured to die. The policy comes to an end at that stage. If a bond is established with multiple lives assured (three or more), the death claim value is paid out on the death of the last of all of the lives assured to die. The policy comes to an end with the death of the last life assured to die. The fact that an individual is a life assured does not, in itself, give him or her any ownership rights in the investment bond. For professional adviser use only, not to be relied upon by any other person.

2 Bond ownership and lives assured combinations Most providers take a reasonably relaxed approach to insurable interest in respect of investment bonds, although there should normally be some family or financial connection between the bond owners and the lives assured. One owner One life assured Own life basis. Life of another basis. Joint lives assured, first death Joint lives assured, last survivor Multiple lives assured Joint owners One life assured One of the owners can be the life assured. The life assured does not need to be either of the owners. Joint lives assured, first death The lives assured will often be the joint owners, but do not Joint lives assured, last survivor The lives assured will often be the joint owners, but do not Multiple lives assured The owners can be included among the lives assured, but do not Changes to lives assured Once an investment bond has been set up, any change to the life assured basis is treated by HM Revenue and Customs (HMRC) in the same way as a final surrender of the investment bond. That is, as a taxable chargeable event. This is because HMRC considers adding or removing a life assured, or changing from a first death to a last survivor basis, to be a fundamental change to the terms of the policy. Therefore, providers do not normally offer the option of amending the lives assured on an existing bond. Trustee investments As explained above, the trustees will be the legal owners of the bond. The lives assured are usually chosen from among the trust beneficiaries. Deaths, chargeable events and inheritance tax Chargeable event gains The death of the owner of a capital redemption bond cannot, in itself, create a chargeable event as death claims are not possible and so this does not bring the bond to an end. The death of the owner or one of the owners of a life insurance investment bond cannot, in itself, create a chargeable event for income tax purposes under the chargeable event gains regime. However, if the owner is also a life assured, the death of the individual in his or her role as a life assured may create a chargeable event. This is because a chargeable event arises on: The death of the only life assured. The death of the first life assured, if an investment bond is established on a joint life, first death basis. The death of the last life assured, if an investment bond is established on a joint life, second death basis or a multiple lives assured, last survivor basis. If a death claim arises, the chargeable event gain for income tax purposes is calculated by reference to the surrender value of the bond immediately before death. This remains true even if the value actually paid out in respect of the death claim is higher or lower than this amount. If there are joint owners, each of them is treated as being liable for income tax in respect of half of the total chargeable event gain. Inheritance tax The following comments apply to both capital redemption bonds and life insurance investment bonds held as investments by individuals. This section is not relevant to investment bonds held as trust assets. In the event of the death of the owner of an investment bond, the value of his or her share of the open market value of the investment bond as at the date of death must be included in his or her inheritance tax (IHT) estate. If the first of joint owners has died, half the open market value as at the date of death is included in the valuation of the deceased s IHT estate.

3 How does this work in practice? Example 1 Jointly owned investment bond held by a married couple: George and Netta, who are married, take out a jointly owned investment bond, under which they are both lives assured on a last survivor basis. George dies first and Netta automatically becomes the sole owner of the investment bond by right of survivorship. Because of this, the provider will not require sight of the grant of probate or letters of administration. Netta only needs to produce George s death certificate to the provider to enable it to transfer ownership of the investment bond into her sole name. As the investment bond continues with Netta as the sole life assured, there is no death claim on George s death and therefore no chargeable event for income tax purposes. George s share of the open market value of the investment bond as at the date of his death is included in his IHT estate. However, because transfers of assets to a spouse are exempt for IHT purposes, no IHT liability arises in respect of the transfer of George s share of the investment bond to Netta on his death. Example 2 Jointly owned investment bond held by a co-habiting couple: For Franklin and Eva, who are cohabiting, establishing an investment bond as joint owners on a joint lives assured, last survivor basis has different IHT implications. Franklin dies first and his executors must normally include half the open market value of the investment bond as at the date of his death when calculating the amount of his IHT estate. The transfer of the ownership of his share of the investment bond to Eva by right of survivorship is not an exempt transfer for IHT purposes, and therefore uses part or all of his available IHT nil rate band. However, Franklin s death does not lead to a death claim under the terms of the investment bond, so there is no chargeable event and no income tax liability in respect of any gain in the value of the investment bond up to the date of his death. Eva automatically becomes the sole legal owner of the investment bond on Franklin s death, without needing to wait for probate. Eva may find this helpful; particularly if Franklin s other assets were held in his sole name. Even if Eva is the sole beneficiary of his will, she cannot access his other assets until his executors have obtained probate and distributed his estate to her. Eva dies several years after Franklin and her will leaves all her assets to her son, Kevin. As Eva is the last life assured on the investment bond, her death results in a death claim chargeable event based on the surrender value of the investment bond immediately before her death. When calculating the chargeable event gain, Eva is treated as if she had owned the investment bond in her own right from the outset. The details of the gain are included on her final self assessment tax return for the tax year of her death, which is completed on her behalf by her executors, and any income tax due on the gain is payable from her estate at her highest marginal rate. The open market value of the investment bond as at the date of her death is included in her IHT estate. Once Eva s executors have paid all taxes due and completed the administration of her estate, Kevin will usually effectively receive the net proceeds of the investment bond, ie after deducting both income tax and IHT.

4 Example 3 jointly owned investment bond, multiple lives assured: When an investment bond is set up on a last survivor basis with multiple lives assured, an inconveniently timed death claim becomes much less likely. Rollo and Olivia, a married couple, take out an investment bond as joint owners. They and their three children Anna, Adrian and Colin are lives assured on a last survivor basis. When Olivia dies, Rollo becomes the sole owner by right of survivorship. There is no death claim chargeable event and therefore no income tax liability on Olivia s death. As Rollo and Olivia were married, there is no IHT liability in respect of the transfer of value on first death. When Rollo dies several years later, the investment bond remains in force on the lives of Anna, Adrian and Colin. Therefore, the open market value of the investment bond as at the date of Rollo s death is included in his estate for IHT purposes. Example 4 joint owners, joint lives assured, first death: While it is not commonly required, it is also possible to set up an investment bond on a joint life, first death basis. Nick and Toby, who are civil partners, invest into an investment bond on a joint owners, joint lives assured, first death basis. Nick dies first and his death results in a death claim. The death claim proceeds are payable to Toby as the surviving owner. Income tax on the chargeable event gain is assessed 50:50 on Nick and Toby, as they were joint owners at the date the chargeable event gain arose. There are no adverse IHT implications, as Toby is an exempt beneficiary for IHT purposes. Legal ownership of the investment bond vests in Rollo s executors, pending disposal of his assets under the terms of his will. Rollo leaves his estate to his three children, who are all adults, in equal shares. The executors could fulfil this bequest by surrendering the investment bond, causing a chargeable event on the date of the surrender. The executors would be liable to income tax on any gain at the basic rate (20% in 2013/2014) which is covered by the tax credit for an onshore investment bond. The surrender proceeds are then treated as estate income carrying an unreclaimable tax credit in the hands of the three children. Top slicing relief is not available and a higher or additional rate taxpayer has a liability to further income tax. Alternatively, the executors could assign one-third of the investment bond segments to each of Anna, Adrian and Colin. Such assignments do not create chargeable events, as they are not for money or money s worth. As there is no immediate liability to income tax, Rollo s children benefit from a higher net bequest than if a death claim had occurred on his death. After assignment Anna, Adrian and Colin will each be treated as the sole owners of their own investment bond segments as if they had owned them from the outset. If Anna encashes her segments, for example, she will be assessed to income tax on any chargeable event gain at her own highest marginal rate.

5 All values used above are examples used to illustrate a point of tax law and are not meant to represent real or anticipated growth or rates of return. This fact sheet does not apply to company investments. Special tax rules apply to company owned investment bonds. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. June 2013 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number FP /15