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Kirk Rice Blog

Surrendering An Investment Bond – What Are The Tax ConsiderationsWritten on June 11, 2019 by Kirk Rice LLP

Surrendering An Investment Bond – What Are The Tax  Considerations
Financial Services Questions

The Question:

My wife and I allocated some of our savings to an investment bond 10 years ago. It is showing a healthy profit and we are considering cashing it in. But before doing so, we want to understand the tax position; we assume the profit will be subject to tax? We are both in our late 60’s and retired. We plan to reinvest some into an ISA, gift some to our son and the balance will top up our savings.

Kirk Rice LLP answers:

The taxation of an investment bond can get complex, so do get detailed and specific advice before acting as some simple planning prior to encashment could be the difference between paying tax and not paying it.

The following aims to summarise some of the key points; and investment bond can either be onshore or offshore and there is a difference in the tax treatment. The main one is that for onshore bonds, life assurance companies pay corporation tax on the funds. For tax purposes, this is deemed to be the same as basic rate tax and there is a 20% tax credit. Offshore bonds are not subject to corporation tax and there is no tax credit. So, for an onshore bond there has been some tax deducted on an on-going basis. But for offshore bonds there has been no tax deducted on an ongoing basis. You would, however, expect the investment performance to be better.

Cashing in an investment bond is a chargeable event. This means tax may be payable and to determine this you need to calculate what the chargeable gain is. To do this you take the surrender value and add the value of any withdrawals (not partial encashments – see later) that have been taken. You then deduct the amount originally invested and the result is your chargeable gain. If the bond is held jointly you divide the chargeable gain 50/50.

To determine if tax is payable or the amount you each now need to add this to your other income in the tax year of encashment. If the total is within the basic rate tax band (currently £50,000 inclusive of personal allowance) there is no further tax to pay for an onshore bond as it has the 20% tax credit. The offshore bond would be subject to income tax at 20% although some could still be tax free if you have unused personal or savings allowance. If any of the chargeable gain is in the higher rate tax band, it is subject to tax at 20% for the onshore bond and 40% for the offshore. It is quite possible that ordinarily you are a basic rate tax payer but the chargeable gain has pushed you in to the higher rate tax band. In this instance you can use top slicing. This allows you to divide the chargeable gain by the number of complete years the bond has been running. The resultant slice is added to your other income, and if the total remains within the basic rate tax band, there is no further tax payable for the onshore bond and you keep the tax to 20% for the offshore. If your income is already in the higher rate tax band top slicing will normally have no benefit. If one of you is a higher rate tax payer and the other is not, you should consider assigning the ownership of the bond to the one that is a basic rate tax payer prior to cashing in. The chargeable gain will then be all theirs and this will reduce the tax liability.

In the past you may have taken withdrawals from the bond and this can be done in one of two ways. The first is using the 5%pa tax deferred allowance. This allows you to withdraw up to 5%pa of the amount originally invested for each policy year. Any unused 5% allowance carries forward, so as an example after 4 years you could withdraw 20%. These withdrawals are tax deferred and therefore they are added to the surrender value when calculating the chargeable gain. The other method is to cash in a number of segments. Most bonds will be set up under a number of segments and you can opt to cash in the number of segments you need to generate the money you want to withdraw. The tax treatment of cashing in segments is the same as cashing in the entire bond. The segments cashed in will be assessed for tax in the tax year the encashment is made. Partial encashments can be ignored thereafter. The above is a summary so do get personal advice before acting.

DOWNLOAD OUR KEY GUIDES

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INVESTING TAX EFFICIENTLY

PENSIONS AND TAX PLANNING FOR HIGH EARNERS

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Any reader interested in discussing surrendering an investment bond or any other investment matter can call to 01344 875 000  to speak with one of our financial planners or email info@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. The information is based on current tax legislation which may change in future.

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