The trustees of a charitable trust have advised me that they want to encash an investment bond they hold with an insurance company and have asked me to confirm that no tax is payable. Are they correct?

If the investment bond is a UK policy then yes, no additional tax is due on the gain. However, if this is a non-UK policy then they will have tax to pay.

Sections 521 to 526 Income Tax Act (ITA) 2007 stipulate which income is exempt and the conditions that need to be met for the exemption to apply.  Chargeable event gains are not included. Although a charitable trust is generally a discretionary trust, it is only liable to income tax at the basic rate (s479(1)(b) ITA 2007). Therefore as notional basic rate income tax is deemed to have been paid on the chargeable event gains arising from UK policies, no further income tax would be due. There is no notional basic rate tax on most non-UK policies and so a 20% income tax liability would arise.

If the charity has an income tax liability and does not receive a notice to file a self-assessment return, then it must notify HMRC by 5th October after the end of the tax year of liability to avoid a late notification penalty. For a trust, even a charitable trust, this is done via the Trust Registration Service. See “Register your client’s trust” on the GOV.UK website.

A possible cause for concern is how the trust came to own the investment bond. There are no further tax issues if this was assigned by gift to the charity, perhaps by the original owner. However, if the charity used its own funds to acquire the investment bond then this would not be a qualifying investment within the meaning of s558 ITA 2007 (with one exception, see below).   Therefore the amount invested would be non-charitable expenditure by virtue of s543(1)(i) ITA 2007. This would mean an equivalent amount of the charity’s “attributable income” (including gift aid receipts) would be chargeable to income tax under s540 ITA 2007. If the non-charitable expenditure exceeds the attributable income for the year, the excess can be carried back under s562 ITA 2007 against attributable income arising in the previous six years.

The above-mentioned exception to an investment not otherwise falling within the specific exempt types listed in s558 is Type 12 being:

“ A loan or other investment as to which  an officer of Revenue and Customs is satisfied, on a claim, that it is made for the benefit  of the charitable trust and not for the avoidance of tax (whether by the trust or any other person)”

A Type 12 qualification is only given at HMRC’s discretion and so it is always advisable to make a claim before making an investment not falling within the other qualifying types listed in s558. Based on anecdotal evidence, HMRC are known not to exercise their discretion for single premium investment bonds.

Contrary to popular belief, not all charity income is exempt from tax and all charitable investments or loans are subject to tax rules and conditions – tax traps await the unprepared.

HMRC provides useful guidance on charities, mentioning the underlying law, on the GOV.UK website at:

In association with Croner Taxwise

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