income tax on investment

[piper777]

wondering if anyone can advise on this.

Have a Prudential investment bond , paid in 6k over 24 rears ago. no withdrawals to date and now worth 20K.

If i wish to take out 10K, i believe i can carry forward an allowance of 5% on initial investment i.e 6K without paying income tax.

How will the extra 4K be treated?. Will I have to pay tax on this, if currently a nil rate tax payer. ?

Also If i subsequently withdraw again another 5K in same tax year will i need to fill in a self assessment tax form as gains over 10K (does this include the 6K i can use as my 5% allowances )---- really don't want this hastle!

Hope thats clear ... would be grateful if someone could shed light, i have tried to ask prudential, but the person i talked to didn't have a clue !!

many thanks

[ben_power]

If you're currently a non-taxpayer then I would question the advantages of retaining the investment bond at all.

If you were to fully surrender the bond the top slice (average growth per complete year held) would total approx. £583.33, which wouldn't push you into a higher rate tax threshold so no 'further' tax is due. The clue is in the word 'further' as the tax is deemed to have already be paid. Th bad news is that you've basically been paying 20% tax on any gains each year for pretty much no reason.

An investment bond is just a tax wrapper, or 'a bucket' with specific tax rules, some of which you're familiar with. In most situations, you would be better placed utilising an ISA instead as no tax is applicable and you can take the whole lot out with no tax to pay.

If you're completely wed on the investment within the investment bond, you'll probably be able to find the same fund and stick it in an ISA, at least ensuring the growth the investment achieves in the future is all yours and not paying 20% tax for the sake of it.

[piper777]

thank you so much Ben for this very clear explanation.

If u don't mind could i just bother you a little further!

I had indeed in reality wanted to cash in the full Bond. But on reading up it appears that the providers issue a chargeable event certificate on any funds withdrawn over the 5%. My main concern on taking the full amount out is to whether :

The chargeable event will be over 10K and the certificate sent to HRMC, i have read that if over 10K then a self assessment needs to be filled ----- which i really wish to avoid if possible. Yet, i have also read that if no tax due it does not? Can u, or anyone shed light on this.

Many thanks

[ben_power]

The chargeable event certificate will indeed be produced by the provider and they will send this to you stating you may be liable to further tax, and you 'should' of course report this to HMRC but this is because they are unaware of your tax position and aren't offering you advice, essentially providing protection for themselves and letting you know you 'may be liable to tax'.

I'm sure there are many reasons why reporting to HMRC is 'correct' but all you'd be doing is reporting a gain on an investment that you've already paid the tax on, and they'd agree. Pointless.

If you choose to not report it, what are they going to say if they find out? You should have reported that you didn't owe us any tax? I've never heard of them questioning surrenders of investment bonds.

The only real issue you could have is if you partially surrender the bond. Investment bonds are typically split into 100 segments (mini policies), sometime a thousand, meaning there are two ways to sell down from the bond as a whole. You can sell an equal slice of each policy, a 'top slice' or you can sell a specific number of the segments. The 5% rule is applicable to the segments and if you sell the bond incorrectly, you may be liable to tax, it's messy and advice would be sensible.

If you like the idea of fully surrendering the bond, the top slice calculation previously mentioned will be correct assuming the info provided is.

[piper777]

thanks so much "Ben"

I really appreciate your time in answering this in an understandable way!

Hope it might helps others too!