Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Tax on With Profits Bond cash in.

Practical Issues
DrFfybes
Lemon Quarter
Posts: 3731
Joined: November 6th, 2016, 10:25 pm
Has thanked: 1171 times
Been thanked: 1964 times

Tax on With Profits Bond cash in.

#288176

Postby DrFfybes » March 3rd, 2020, 10:28 am

Mum has quite a few "Life With Profits Fund" Bonds from the 1990s.

For the last 12 or so years she has taken up to 5% of the original sum invested as income, however care needs are changing so I was looking at cashing in some of them this tax year and some next. The bonds are in many small polices, so (eg) one of them per £750 original unit invested the current value is £3k, but she has taken £500 income from each one meaning a Gain per unit of £2750. I figured I could cash in 2 units this month to use some of this years CGT allowance and then more next tax year if/when required

Mum is a non tax payer, her sole taxable income is her State pension circa £7k pa.

My confusion is that the Chargeable Event seems to be based on the date the bond started, not the tax year.. Here
https://www.pruadviser.co.uk/knowledge- ... nt-bonds/#
it says the gain arises at the end of the "Insurance Year", which suggests to me that even if I take money this month, the gain doesn't arise until the anniversary of the bond being taken out, which is December, so cashing in now doesn't use this years CGT allowance?

As some were started in October, December, Feb, and some in June, then cashing any in this month would not use her 19/20 CGT allowance, however ifif we were to surrender a unit in July.... one that was started in Oct would create a Gain in Oct 2020, however one started in June would mean the Gain does not arise until June 2021, falling in the 21/22 tax year CGT allowance.

This does seem a bit odd to me, but am I correct here?

thanks

Paul

Alaric
Lemon Half
Posts: 6033
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1399 times

Re: Tax on With Profits Bond cash in.

#288197

Postby Alaric » March 3rd, 2020, 11:58 am

DrFfybes wrote:Mum has quite a few "Life With Profits Fund" Bonds from the 1990s.


There isn't a Capital Gains Tax liability to the policyholder as this is assumed settled by taxation on the issuer of the Bond.

See https://www.pru.co.uk/pdf/INVS0002.pdf or similar material issued by other providers. It's only higher rate tax where there can be a potential liability.

DrFfybes
Lemon Quarter
Posts: 3731
Joined: November 6th, 2016, 10:25 pm
Has thanked: 1171 times
Been thanked: 1964 times

Re: Tax on With Profits Bond cash in.

#288232

Postby DrFfybes » March 3rd, 2020, 2:10 pm

Thanks,

That document is much clearer. There isn't any original paperwork apart from the certificates in a tatty envelope and annual statements from since she started drawing on them.

Paul

PinkDalek
Lemon Half
Posts: 6139
Joined: November 4th, 2016, 1:12 pm
Has thanked: 1589 times
Been thanked: 1801 times

Re: Tax on With Profits Bond cash in.

#288259

Postby PinkDalek » March 3rd, 2020, 3:53 pm

DrFfybes wrote:There isn't any original paperwork apart from the certificates in a tatty envelope and annual statements from since she started drawing on them.


As per the pru link:

When a chargeable event occurs, you will be sent details of any chargeable event gain arising for you to notify HMRC of the gain. Prudential may also send details of the chargeable event gain direct to HMRC.

So that part at least shouldn't be a problem.

effsweet
Posts: 12
Joined: December 21st, 2019, 9:29 pm
Has thanked: 9 times
Been thanked: 2 times

Re: Tax on With Profits Bond cash in.

#288323

Postby effsweet » March 3rd, 2020, 9:11 pm

Paul hi,

My wife has an investment Bond ( a cluster of smaller policies as your Mother has)

She has realised a number of them in the last fortnight.

She already has a Chargeable Event Certificate (although the Policy year ends each November)
The chargeable gain has been generated in this tax year 2019/20.

Their will be no tax to pay as long as your Mother's income in this tax year doesn't exceed her basic rate tax allowances,
ie
"We are writing to let you know of the occurrence of a Chargeable Event following the surrender of
contracts 16-23.
According to Section 552 of the Insurer’s report under Income and Corporation Taxes Act, 1988, there may be a liability to an income tax charge on the gain. However, this gain may only affect individuals who are or become liable to income tax above the basic rate. A gain may also affect entitlement to personal allowances and/or certain tax credits. The details of this are enclosed and must be included on your tax return for the year in which the event occurred."

I found the PruAdviser explanation of Bond gain taxation incomplete

Regards: effsweet

DrFfybes
Lemon Quarter
Posts: 3731
Joined: November 6th, 2016, 10:25 pm
Has thanked: 1171 times
Been thanked: 1964 times

Re: Tax on With Profits Bond cash in.

#407984

Postby DrFfybes » April 29th, 2021, 11:46 am

Hi All,

Delving back a few weeks here, and things have moved on slightly. This few weeks also included the end of the tax year, but it seems the gain arises on the next anniversary of the bond, not when you take the money (well, that's what one document appears to say), so it didn't matter.

I have been informed that the Bonds are outside the remit of the local Authority when it comes to care fees, so there is some advantage in holding them. However it is unlikely that at 90 years old if mum goes into a home tomorrow that her ISA and flat sale proceeds would not last longer than she will. so unlikely that there would be an advantage in keeping them.

However I also discovered that on her death they are treated as being taxable, i assumed as a Life Policy the payout was tax free. This led me down the rabbit hole of top slicing relief, which seems to be far more complicated than I could ever imagine. So, if anyone cleverer than I am could check what I worked out so far, and then steer me in the correct direction I would be most grateful. I'm following the pru example, which doesn't seem too intuitive, so bear with me...


Policy 1...Opened 15 May 2000. £15k in. £9k taken out, value £33k. Chargeable gain £27k over 20 years. Annual Equivalent £1350
Policy 2... Opened Feb 1994, £15,200 in. £11k taken out, value £60k. Chargeable gain £55.8k over 27 years. Annual Equivalent £2070
Policy 3... Paid in Oct 1999 - June 2001, £21k in. £14.5k taken out, value £35.5k. Chargeable gain £29k over 19 years. Annual Equivalent £1525

Total gain £111.8k.
Total "annual equivalent" £4945
Top slicing factor = 111,800/4945 = 22.6 years.

No other taxable income except £7.2k pension,

Now I've just spent an hour doing various complicated calculations looking at different examples, reducing her personal allowance as total income is over £100k, but reinstating it as the slice is small, but I keep coming back to the same thing --- "extra tax due on the £4945 slice is zero because it all falls within the lower limit" and as they are onshore bonds then no further liability.

Am I correct, or going even more mad than I thought?

Many thanks

Paul


Return to “Taxes (Practical)”

Who is online

Users browsing this forum: No registered users and 7 guests