deed of assignment bond

Assignment of an Investment Bond

Life insurance investment bonds are single-premium policies that provide tax efficiencies and comprise varied investments. Capital redemption bonds have fixed terms, allowing investors to select assets with strong growth potential and offering tax-efficient withdrawals.

An assignment refers to the process whereby you transfer the ownership of an investment bond or capital redemption bond, or segments of either product. As this constitutes a legal transfer of ownership to another person, an assignment is completed with a formal legal document called a deed of assignment.

You may assign an investment bond or segment of a policy as a gift, to provide financial support for a family member or adult child, or as part of your estate planning. Understanding the tax implications is important for all parties.

Table of Contents

What Is an Assignment of an Investment Bond?

Assigning an investment bond transfers ownership to your selected recipient. The nature of assignment means the recipient owns the bond or policy segment and is treated as the original beneficial owner, in the same way as if they had held the bond from the initial investment date.

The rules around assignments offer tax planning opportunities, and you can complete varied types of assignments, including:

• Gifted assignments: When you assign a bond to a loved one or family member, you transfer ownership to your beneficiary. Note that assignments as part of a separation or divorce settlement are not often treated as gifts by HMRC.
• Mortgage assignments: An assignment by way of mortgage means that the security underlying the bond is transferred to a third party. The recipient receives the right to accept payment for debt assets.
• Assignments into a trust: Completing an assignment into or out of a trust means the ownership and rights to the investment bond transition into or from the trust.

In any scenario, an assignment is a legally binding transaction that should be completed with a comprehensive understanding of the outcomes, potential taxation liabilities arising, and effects on your inheritance planning.

The Benefits of Assigning an Investment Bond

Much depends on the reason for the assignment, but there may be advantages, not least if you transfer ownership to a taxpayer in a lower tax bracket.

Owners can assign a bond to an adult child without capital gains tax liability. Many other gifted investments would trigger a capital gains tax obligation in the same way as investment disposal would.

There is no immediate income tax obligation because an assignment is not considered a chargeable event and therefore is not subject to income tax. However, this relies on completing the assignment without payment or any other form of money changing hands. Gifted assignments are treated as ‘not for money’ ownership assignments.

When assigning a bond to a trust, usually as an inheritance tax planning exercise, there is equally no capital gains or income tax charge arising, which also applies where the assignment transfers ownership to an individual.

Provided the assignment is a gift, an assignment is highly efficient from a tax perspective. If you choose to assign a bond or segments of a bond to another taxpayer subject to a lower tax bracket, you can effectively reduce the income tax payable on encashment.

Finally, when considering inheritance tax planning , if the assignment is a gift, and you live for at least seven years following the assignment, then the entire bond value will normally not be included within your estate for calculation purposes, whereas other gifts, and those occurring within seven years of the transfer, may be subject to inheritance tax.

Tax Planning Opportunities Linked With Investment Bond Assignments

You might consider assigning a bond for many reasons, one of which relates to the costs of educational and university expenses. Policyholders can assign investment bonds to an adult child and, if the recipient has an unused personal allowance, mitigate exposure to taxation.

Another opportunity exists where the gain, or gain after top-slicing, would fall within the basic tax rate, and the recipient falls within this income category. Owners can assign policies to any family member with a lower income tax rate, controlling the tax liability against a gain or capital drawdown.

As with any financial transaction, there are pitfalls to be conscious of because once a bond has been assigned, it is legally owned and controlled by the recipient. If the new owner of the bond passes away, there is the potential for the full value to be included in inheritance tax calculations if the assignment has not been made through a trust. An additional risk could be when the new owner separates or divorces a spouse, in which case the full bond value may be included in settlement negotiations.

These scenarios may not affect your decision-making, but remaining aware of possible disadvantages or outcomes remains important to make informed decisions.

Professional Advice on the Assignment of an Investment Bond

Chase Buchanan works with expatriates and investors worldwide and always recommends you consult an experienced, knowledgeable adviser to evaluate the potential outcomes, risks, and rewards of any long-term financial planning decisions.

Insurance investment bonds are highly flexible, provide tax efficiencies, and can be assigned at any time to conform to your tax planning requirements, financial objectives or familial needs. Assets underlying a bond appreciate and grow without income or capital gains tax deductions and qualify for top-slicing and apportionment relief.

A further positive element is that investment bonds are not currently incorporated into means testing, which can be a factor when budgeting for later life care and estate planning. A deed of assignment is a relatively simple way of gifting or transferring ownership to the recipient of your choice.

There are varied benefits available when assigning a bond to a trust. Still, the priority is to appraise the suitability of the transaction beforehand to ensure it meets your requirements and expectations.

Please get in touch with your nearest Chase Buchanan office for more wealth management information, to arrange a convenient time to discuss your plans to initiate an investment bond assignment, or to assess the options available.

*Information correct as at March 2023

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Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

Table of Contents

• What is a Deed of Novation? 
• What is a Deed of Assignment? 

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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Drafting a Deed of Assignment

I have been instructed to prepare a Deed of Assignment in respect of two investment bonds put into effect in 2015. It is now clear they were incorrectly set up by the financial adviser, so that the Trustee has the benefit personally, rather than holding as Trustee. My question is, do I need to make any reference to this in the Deed?

Changes to investment bonds is typically undertaken with the provider. They usually have they’re own paperwork.

I’d contact the provider first, I’m assuming you wish to make changes to the beneficiaries.

Richard Bishop PFEP

Hi Richard.

Thanks for responding. In this case its the insurance company that referred the matter to us, I can only think its perhaps because it was their mistake initially and they are paying our costs that they have asked us to do it.

Gail Weston

Is this a bigger issue than just drafting a deed of assignment?

If the 2015 assignment effectively gave the bonds to the intended trustee personally, might not the assignment into trust be considered a settlement by them for IHT purposes, etc.?

If the 2015 assignment had the wrong effect I wonder if it should be remedied by an application to court for rectification. If the original transaction is not rectified, the mere completion of a new deed of assignment may fully utilise the “trustee’s” IHT nil rate band, significantly inhibiting their ability to conduct any IHT planning themselves. Should they die within 7 years of the new deed, their estate will be penalised if their nil rate band is no longer available as a result of what happens now.

I suggest it would be appropriate to contact HMRC before any documents are executed, to see if it will agree to look through the proposed deed to the original intention. This may seem over cautious, but I understand HMRC consistently asserts that it will not accept “rectification” of a mistake without a court order.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you. It was for that reason I thought we must have to do something to show the trustee is not making a settlement personally, but I wondered if the error could somehow be referred to in a Deed of Assignment so that it was clear.

Another member pointed out that a trust doesn’t have to be in writing (other than land) and suggested the legal owner might execute a Declaration of Trust to confirm how she holds the bonds, but making it clear that the trust was established when the bonds were first assigned to her. Could that work? Thank you for responding. I do very little trust work, but I know enough to know when to be wary and I think I might now refer this on to someone else!

Gail Weston WMB Law Ltd

What trusts would she arguably hold the bonds upon? The relevant trusts would have to have been at least ascertainable at the time of acquisition of the bonds. The only one of the vital Three Certainties here seems to have been the subject-matter. It is a stretch to conclude that she originally acquired as trustee unless she did so knowingly as such and beyond a vague understanding (e.g. as a constructive trustee, when it would be a key part of the analysis to be able to identify the beneficiary also). If it appears so definitively that she took originally as beneficiary, however mistakenly, retrospection is not an option. In law the Trustee is just not a trustee at all it would seem.

The remedy the law provides is rectification which is discretionary, but awarded or denied according to established principle, and subject to evidence about the nature of the mistake alleged. As Paul says, HMRC’s practice is to insist on a court order— but rarely to intervene in the process and to abide by the outcome. This is reasonable because an order will bind all persons interested, including the bond provider, whereas if HMRC just took a unilateral view (second-guessing the court’s discretion) that in theory might be successfully challenged and it might not even bind the taxpayer.

A bond provider will be reluctant to pay out anyone other than the apparent legal owner or their assignee, to obtain a good discharge. Asserting that the bonds are really held on some trust is likely to spook them. Here the matter is referred by them and, without prejudice as to culpability, indicates some kind of notice of a possible trust with at least a resultant strong doubt on their part about whom to pay. An assignment apparently fixes that but is not retrospective. It still involves their taking a view that the “Trustee” has the right to act as assignor but the assignee may be the only person or persons who might otherwise contest her personal entitlement.

It is not clear whether there is recourse against the financial adviser or bond provider (or admission of liability or creditworthiness) or precisely whose mistake is alleged to be operative and why, or the value at stake. Indeed it is not clear who is your client and what are your instructions. The bond provider may be paying and be the client for the mechanical drafting but it seems the “Trustee” is the likely client for the advice as the intending assignor. Is there a conflict?

Jack Harper

Thank you for your response. Sorry, I probably should have given more detail. The Trustee is my client. She was referred to me by a Wealth Management Company, who are paying her costs. She holds on the trusts of her late sisters Will for minor beneficiaries and took advice from them the company on where to invest. The trust funds were subsequently invested in two Bonds with that Company, but the clients new adviser has now spotted that apparently the Bonds were set up as though she herself was the owner and beneficiary, instead of holding as Trustee.

In those circumstances there must be a strong inference that she is a constructive trustee of the bonds. She has used trust funds to subscribe for the bonds. Equity would not permit her to hold them otherwise than on the existing Will trusts. If she is the sole trustee an assignment is somewhat over the top. Although you can assign to yourself in a different capacity here she would be a trustee on both sides, constructive as assignor and appointed as assignee. I suggest all she needs is to receive positive legal advice that she needs to do nothing and why. Even appointing a co-trustee just for a meaningful assignment seems excessive if the Will trust is not one of land and if is not considered desirable otherwise e.g. to secure trusteeship succession.

In agreement with Jack, as the individual knows the terms on which they are supposed to be holding the bonds (here, the trusts which are set out in the Will), the individual can execute a Declaration of Trust stating that. Similarly, I would recommend a second trustee - indeed, the terms of some Will trusts require there to be two trustees for the exercise of certain powers. If a second trustee is going to be added, the Deed of Assignment (from “Trustee A” to “Trustee A and Trustee B” could set out initially that Trustee A holds the bonds on the trusts of the Will, before the assignment to A&B “… to hold on the terms of those trusts…” (or similar). It is worth being absolutely sure that, at the time of the original investment, there was no intention that the bonds (or the funds used to invest in them) should belong beneficially to A. Gail says that this was not the intention, but any evidence of that (eg correspondence, attendance notes, etc) would be useful to keep should the position be queried in the future.

Paul Davidoff New Quadrant

I would only add to Paul’s sound comments and action plan that if she used trust funds to subscribe she would hold the bonds as a constructive trustee even if she had had the actual intention of benefiting personally

Thank you both. That way makes sense to me. There was never any intention of benefitting personally. Until learning otherwise, she believed the trust funds were rightly invested for her nieces. As you suggest I will see what paperwork exists from the end of the administration period and proceed as you suggest.

Many thanks. Gail Weston

Assignment or Appointment

Explains how the ability to move the tax on a chargeable gain can be a valuable tax planning tool.

One of the advantages of investment bonds is the ability to move the tax point away from the original owner to another. This strategic planning benefit can be used with investment bonds held individually or within a trust and coupled with an effective exit strategy can help reduce the tax payable on a chargeable gain.

Individually held bonds

An assignment is a process whereby one person, the assignor, transfers assets to another person, the assignee, who becomes the new owner of the assets.

This mechanism allows the tax point of an investment bond to be deflected away from the original owner to a new owner. The benefit of being able to assign, or change policy ownership, is that the transaction is not a chargeable event for the purposes of income tax, provided that it is a genuine gift and has not been assigned for money or money’s worth.

Where an assignment is made as part of a divorce settlement HMRC will only treat the assignment as a gift if it is specifically mentioned in the court order. If it is not mentioned then the assignment would be treated as a gift for money or money’s worth, making it a chargeable event.

It could be that the new owner pays tax at a lower rate, or better still, is a non-taxpayer. As the new owner they would have the authority to surrender the policy and pay tax (if applicable) on the chargeable gain, at their marginal rate of income tax.

Remember, if the new owner is an individual the assignment would be a potentially exempt transfer for inheritance tax purposes, unless it is covered by any available exemptions. If the new owner is a trust the assignment would either be a potentially exempt transfer or a chargeable lifetime transfer, depending on whether the trust is absolute or discretionary.

If the assignment is between a married couple or civil partners and the proceeds benefit both of the original owners and not just the new owner, HMRC might look at the overall transaction rather than the individual steps and apply tax accordingly.

There are no time constraints on the new owner to surrender the bond. If the surrender is deferred following assignment, additional years of top-slicing relief could accumulate and potentially mitigate the tax liability, when it is ultimately surrendered. Additionally, if dealing with an offshore bond, the timing aspect should focus on the appropriate tax year to surrender so that the bond gain can soak up what remains of the new policy owner’s personal allowance, starting rate band for savings income and personal savings allowance.

Investment bonds held by trustees

Even where an investment bond is held under a trust the trustees still have the ability to assign ownership from themselves to a beneficiary, rather than surrendering the bond within the trust and distributing cash.

Where an investment bond is held in a discretionary trust, any chargeable gain is assessed on the settlor if the chargeable event occurs while the settlor is alive at any point in the tax year and is UK resident.

If the settlor cannot be taxed because they died in a previous tax year or they are non-UK resident, the chargeable gain is assessed on a UK trust. This means that a UK trust could potentially pay up to 45% tax on an offshore bond gain or 25% on an onshore bond gain.

Moving the tax point to a beneficiary can result in a better tax position because that beneficiary could potentially be a lower taxpayer, have sufficient personal allowances to soak up any gains and be entitled to use top-slicing relief.

When dealing with a discretionary trust the trustees have two options; they can either assign legal ownership to the beneficiary for them to hold individually or use a deed of appointment to create a bare trust.

Where the beneficiary is over 18 and so can legally own an investment bond, the trustees can complete an assignment. As the trustees are distributing rights under the trust it is not a chargeable event for the purposes of income tax but there could potentially be an inheritance tax exit charge.

The beneficiary then becomes the legal owner of the bond meaning that any chargeable gains would be taxed at their marginal rate of tax.

Where there are minor beneficiaries who cannot legally own an investment bond, instead of assigning the bond the trustees can execute a deed of appointment to create a bare trust. The trustees remain the owners of the bond but the impact of the appointment is to effectively carve out the policies for the minor beneficiaries. Any chargeable gain under a bare trust is assessed on the beneficiary, so this moves the tax point to the minor beneficiary.

However, remember that if the parents of a minor beneficiary establish a trust, any distribution to that minor beneficiary (whilst unmarried or in a civil partnership) which results in a chargeable gain exceeding £100 in the tax year will all be taxed on the parent.

• The ability to assign or appointinvestment bonds to newowners can be a valuabletax planning tool.
• The assignment or appointment is usually not achargeable event which gives owners the opportunityto plan suitable exit strategies.
• The ability to move the tax point allows anysubsequent chargeable gains to be assessedon a lower or non-taxpayer.

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at May 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.