An assignment by way of gift does not trigger a chargeable event, and is therefore useful for tax planning purposes since subsequent chargeable event gains are assessed on the assignee (new owner). This planning is often used by spouses / civil partners where the assignor is higher rate and the assignee is basic rate or lower. In such an event the gift would be exempt for IHT purposes. Regardless of the relationship between the parties, assignments must be outright and unconditional.

Where it is not appropriate to assign a bond in its entirety, then consideration may be given to assignment of individual segments or policies within the bond.

Where cumulative 5% allowances are exceeded then the resultant gain bears no correlation to the economic performance of the bond. A significant partial withdrawal can therefore inadvertently create a chargeable event gain. In these circumstances, it may be more tax efficient to fully surrender individual segments than take a withdrawal across all segments.

Note that legislation is in place (S507A ITTOIA 2005) allowing a person who has made a part surrender or part assignment giving rise to a gain under S507 to apply to HMRC to have the gain reviewed if they consider it is wholly disproportionate. Applications must be made in writing and received within 4 years after the end of the tax year in which the gain under S507 arose. A longer period may be allowed if the officer agrees. If the officer considers that the gain is disproportionate, then the gain must be recalculated on a just and reasonable basis. The legislation came into force on 16 November 2017.

If 30 segments are encashed then 70 will remain. The cost of these 70 segments is £70,000 meaning that the future 5% allowance will be reduced to £70,000 x 5% = £3,500

Where a partial surrender gain which arises on the last day of the insurance year is followed by a full surrender in the same tax year then the partial surrender gain is ignored and instead the proceeds are brought into the final surrender gain calculation.

Example of a part surrender gain ‘superseded’ by a full surrender in the same tax year

On 1 January 2018, Julie invested £100,000 into a UK bond.

On 1 December 2021 she withdraws £60,000 across all the segments.

Assume that Julie realises the consequences of the withdrawal and fully surrenders the bond prior to 6 April 2022 for £55,000. Assume full surrender occurs on 1 April 2022.

The partial surrender gain above is ignored, and instead the calculation on final surrender will be as follows

In the above example, regarding chargeable event reporting by the life company, the situation will be as follows:

The gain which originally arose at 31/12/21 will be reportable to the policyholder before the time limit of 31/03/22.

If Julie fully surrenders on 1 April 2022, the final insurance year becomes 1 January 2021 to 1 April 2022 and the calculation of the final gain on surrender takes in all the transactions over this period, superseding the gain that arose on 31/12/21. This excess is no longer a chargeable event but no revised certificate is required. To be helpful, the insurer may tell Julie that the certificate issued on the final event supersedes the earlier certificate.

In the example, it is less likely that a certificate has been issued to HMRC before the insurer becomes aware of the final surrender. The time limit for reporting the excess gain to HMRC is 05/07/22 (three months from the end of the tax year in which the event occurred). So, in this example and in most cases the insurer will already know that the excess event has been superseded before it has issued the certificate.

It is important for policyholders to be fully aware of the consequences when taking a withdrawal from a bond. In IPTM1510, HMRC state the following

IPTM7330 is also of particular relevance and it is worth considering the following four paragraphs taken from this. The blunt message to policyholders is to think before a withdrawal is requested otherwise it may be too late.

Death giving rise to benefits is a chargeable event. Accordingly where a bond is taken out on a single owner single life assured basis then a tax charge might arise automatically on death. Additional lives assured can therefore create tax planning opportunities.