Bare trusts for minors - taxation of life policy gains
This article deals with how HM Revenue & Customs treats gains on life assurance policies held under bare trust for minors.
Facts and analysis
HM Revenue & Customs (HMRC) have provided confirmation of the way Life insurance gains held in a bare trust for a minor are assessed to Income tax.
How were gains assessed prior to this announcement?
Previously, where a chargeable event gain arose on a life policy held in a bare trust for a minor, HMRC would assess the gains to income tax on the settlor of the trust.
HMRC took legal advice on the position where a chargeable gain arises on a life policy held subject to a bare trust. That advice suggests that in these circumstances, the previous HMRC view (that settlors were the persons liable for income tax on such gains) was incorrect.
HMRC’s current approach
HMRC's revised view is that even though trustees may have to perform active duties on behalf of beneficiaries who are minors, those minors with an absolute entitlement to the trust income and capital have unimpaired beneficial ownership of life insurance policies held under a bare trust.
In line with the general treatment of other types of trust income for such beneficiaries, it will be the beneficiaries who are liable to income tax on gains arising on the insurance policies held in trust on their behalf.
This view applies for chargeable gains arising from 2007-08 onwards.
Trusts created by either or both parents
Where either or both of the child's parents are the settlors of a bare trust for a minor, the parents will potentially be liable to income tax on gains from a life insurance policy under the 'settlements' legislation which is designed to counter the income tax advantages of transferring property and/or income to minor children.
Income for this purpose includes amounts deemed to be income for tax purposes such as chargeable event gains.
Reporting of chargeable event gains
Where a life policy is held under a bare trust for a minor and a chargeable gain arises, the life assurance company will continue to issue the chargeable event certificate in the name of the 1st named trustee (as they are one of the legal owners of the policy) as provided in HMRC guidance.
This announcement removed an inconsistency in the way Bare trust income is treated for income tax purposes where the beneficiary is a minor.
The information contained in this article has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2020. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice (Ref 12.5)