UK Investment bonds are quite a common type of investment held by individuals and as such you may come across them from time to time when settling financial matters on divorce.

 

What you need to know:

Importantly, they are not ‘qualifying’ policies for UK tax purposes. This means a chargeable event can arise at any time, with tax being payable when a gain is calculated on a chargeable event. The following are the most typical chargeable events:

• Death giving rise to benefits;
• Assignment of all rights under the policy for money or money’s worth
• Maturity (if appropriate)
• Certain part surrenders and part assignments
• Policy loans
• Surrender of all rights under the policy

It may be that a full surrender of on investment bond is the outcome as part of a financial settlement. The potential problem, here, being that a tax liability may arise when it could be avoided.

This is because an assignment that is not for value (ie. not for ‘money or money’s worth’) does not trigger a chargeable event. Therefore, gifting a bond does not create a chargeable event. This provides tax planning opportunities.

Specific assignments which are not for money or money’s worth include assignments in connection with divorce:

• An assignment is not for money or money’s worth where the Court has made an Order:
  • Formally ratifying an agreement reached by the parties that deals with the transfer of assets including the policy, or
  • For ancillary relief under the Matrimonial Causes Act 1973 (or financial provision under the Family Law (Scotland) Act 1985) which results in a transfer of rights under the policy from one spouse to another.

There will be a Court Order for almost every divorce or dissolution involving property and so it may be that an assignment as opposed to surrender may prove to be a more tax beneficial outcome, especially of the parties to a divorce pay tax at different rates.

Where the life office knows that an assignment has taken place as part of a divorce or dissolution settlement, it is entitled to assume that the assignment was not for money or money’s worth. This means that no chargeable event certificate will be issued