A single premium, whole of life investment bond is a particularly attractive investment for a trust. This is due to the tax advantages and simplicity it offers:

• A bond doesn’t create capital gains for the trustees - Trusts have a limited capital gains tax exemption (£1,500 for 2025/26, compared to £3,000 for an individual) and trusts always pay capital gains tax at the higher rate. 
• A bond won’t produce income - Accumulation or discretionary trusts only have a £500 tax free allowance, after which additional rate tax is payable. This means that once trust income exceeds £500, the trust pays tax at 39.35% on dividends or 45% on other income (for 2025/26).
• Tax deferred withdrawals of 5% each year (for up to 20 years) can be taken - This allows the trustees to make distributions of capital to beneficiaries without any requirement to account for income or capital gains.
• The bond can be assigned to a beneficiary before encashment - This results in any chargeable event being assessed against the beneficiary, potentially eliminating or reducing any tax due. In addition, there is a 20% tax credit for onshore bonds, which can be offset against any chargeable gain on encashment.

Who is liable for tax when a trustee held bond is encashed?

Where a trust incurs a chargeable gain, the party liable for tax will depends on the type of trust and the circumstances at that time. The below flowchart shows who the chargeable gain will normally fall on for tax purposes:

The ‘settlor’ is the person or persons who created the trust. Where there is more than one and the gain is attributable to the settlor, the gain will be apportioned between them.

As mentioned, trustees would normally be able to assign a bond to a beneficiary prior to the chargeable event occurring. This causes the chargeable event to be assessed against the beneficiary, which is advantageous as it can reduce or eliminates any tax liability. The beneficiary can also benefit from top-slicing relief, which is not available to trustees. 

An assignment before a chargeable event may not be possible if the life insured dies suddenly. However, this risk can usually be mitigated by writing the bond on a joint life, last survivor basis.

Comment

For those with spare assets, trusts are a great way to preserve wealth for the benefit of family and friends. Investment bonds offer a useful way to grow trust assets in a tax efficient manner, whilst minimising the administrative burden.

Important information

Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.