Money Matters Aug 10

For a time I lived overseas and I invested in an Offshore Bond.  I have been back in the UK for 10 years and want to surrender the Bond.  It is held jointly with my wife who is a Basic Rate Tax Payer whereas I pay Higher Rate.  What would be the Tax position?  Is there anything we can do to mitigate it?  We have not used our Capital Gains Tax Allowance.

Answer:

The Off Shore Bond has benefited from Tax Free Growth but surrendering it triggers a Chargeable Gain and ultimately a Tax charge.  It may be called a Chargeable Gain but it is actually subject to Income Tax, NOT Capital Gains Tax (CGT) and so your CGT Allowance cannot be used to reduce any Tax Liability.  To calculate the Chargeable Gain we start with the Surrender Value and add any previous Withdrawals.   We then deduct the amount originally Invested and any previously Reported Gains.  This is the amount that is Taxable and it will be divided between you and your wife and added to your Income to determine the Tax due.  As a Higher Rate Tax Payer your share will be subject to Tax at 40% or possibly 50% (income exceeds £150,000).  Your wife’s share will be added to her income and it may push her in to the Higher Rate Tax Band (£37,401 excluding Allowances).  In this instance, we use Top Slicing to reduce the Tax Liability.  We divide the Gain by the number of years the Bond has been running which gives a ‘Slice’.  This is added to her income.  If it keeps her below the Higher Rate Tax Threshold, the gain will be taxed at 20%.  Any part of the Slice which falls in the Higher Rate Band will be Taxed at 40%.  We then multiply this by the number of Slices.  You will however both be entitled to Time Apportionment Relief.  This is an adjustment to the Taxable Gain as you should not pay Tax for the period you were living overseas.  The Tax liability could be reduced by assigning the Bond in full or partially to your Wife prior to surrendering.  Any Chargeable Gain will be against her Tax Rates which could save 20% to 30%.  Finally, if you do not need the full amount from the Bond you can withdraw 5% of the Original Investment Value for each year the Bond has been running.  This will have No immediate Tax Charge but Tax will be payable in future.  This is based on current tax legislation which may change.  

Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.