Life insurance investment bonds are single-premium policies that provide tax efficiencies and comprise varied investments. Capital redemption bonds have fixed terms, allowing investors to select assets with strong growth potential and offering tax-efficient withdrawals.
An assignment refers to the process whereby you transfer the ownership of an investment bond or capital redemption bond, or segments of either product. As this constitutes a legal transfer of ownership to another person, an assignment is completed with a formal legal document called a deed of assignment.
You may assign an investment bond or segment of a policy as a gift, to provide financial support for a family member or adult child, or as part of your estate planning. Understanding the tax implications is important for all parties.
What Is an Assignment of an Investment Bond?
Assigning an investment bond transfers ownership to your selected recipient. The nature of assignment means the recipient owns the bond or policy segment and is treated as the original beneficial owner, in the same way as if they had held the bond from the initial investment date.
The rules around assignments offer tax planning opportunities, and you can complete varied types of assignments, including:
- Gifted assignments: When you assign a bond to a loved one or family member, you transfer ownership to your beneficiary. Note that assignments as part of a separation or divorce settlement are not often treated as gifts by HMRC.
- Mortgage assignments: An assignment by way of mortgage means that the security underlying the bond is transferred to a third party. The recipient receives the right to accept payment for debt assets.
- Assignments into a trust: Completing an assignment into or out of a trust means the ownership and rights to the investment bond transition into or from the trust.
In any scenario, an assignment is a legally binding transaction that should be completed with a comprehensive understanding of the outcomes, potential taxation liabilities arising, and effects on your inheritance planning.
The Benefits of Assigning an Investment Bond
Much depends on the reason for the assignment, but there may be advantages, not least if you transfer ownership to a taxpayer in a lower tax bracket.
Owners can assign a bond to an adult child without capital gains tax liability. Many other gifted investments would trigger a capital gains tax obligation in the same way as investment disposal would.
There is no immediate income tax obligation because an assignment is not considered a chargeable event and therefore is not subject to income tax. However, this relies on completing the assignment without payment or any other form of money changing hands. Gifted assignments are treated as ‘not for money’ ownership assignments.
When assigning a bond to a trust, usually as an inheritance tax planning exercise, there is equally no capital gains or income tax charge arising, which also applies where the assignment transfers ownership to an individual.
Provided the assignment is a gift, an assignment is highly efficient from a tax perspective. If you choose to assign a bond or segments of a bond to another taxpayer subject to a lower tax bracket, you can effectively reduce the income tax payable on encashment.
Finally, when considering inheritance tax planning, if the assignment is a gift, and you live for at least seven years following the assignment, then the entire bond value will normally not be included within your estate for calculation purposes, whereas other gifts, and those occurring within seven years of the transfer, may be subject to inheritance tax.
Tax Planning Opportunities Linked With Investment Bond Assignments
You might consider assigning a bond for many reasons, one of which relates to the costs of educational and university expenses. Policyholders can assign investment bonds to an adult child and, if the recipient has an unused personal allowance, mitigate exposure to taxation.
Another opportunity exists where the gain, or gain after top-slicing, would fall within the basic tax rate, and the recipient falls within this income category. Owners can assign policies to any family member with a lower income tax rate, controlling the tax liability against a gain or capital drawdown.
As with any financial transaction, there are pitfalls to be conscious of because once a bond has been assigned, it is legally owned and controlled by the recipient. If the new owner of the bond passes away, there is the potential for the full value to be included in inheritance tax calculations if the assignment has not been made through a trust. An additional risk could be when the new owner separates or divorces a spouse, in which case the full bond value may be included in settlement negotiations.
These scenarios may not affect your decision-making, but remaining aware of possible disadvantages or outcomes remains important to make informed decisions.
Professional Advice on the Assignment of an Investment Bond
Chase Buchanan works with expatriates and investors worldwide and always recommends you consult an experienced, knowledgeable adviser to evaluate the potential outcomes, risks, and rewards of any long-term financial planning decisions.
Insurance investment bonds are highly flexible, provide tax efficiencies, and can be assigned at any time to conform to your tax planning requirements, financial objectives or familial needs. Assets underlying a bond appreciate and grow without income or capital gains tax deductions and qualify for top-slicing and apportionment relief.
A further positive element is that investment bonds are not currently incorporated into means testing, which can be a factor when budgeting for later life care and estate planning. A deed of assignment is a relatively simple way of gifting or transferring ownership to the recipient of your choice.
There are varied benefits available when assigning a bond to a trust. Still, the priority is to appraise the suitability of the transaction beforehand to ensure it meets your requirements and expectations.
Please get in touch with your nearest Chase Buchanan office for more wealth management information, to arrange a convenient time to discuss your plans to initiate an investment bond assignment, or to assess the options available.
*Information correct as at March 2023