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Where Taxpayers and Advisers Meet

Taxation of With Profit Bonds

professor555
Posts: 16
Joined: Sat Oct 02, 2010 6:07 am

Taxation of With Profit Bonds

Postby professor555 » Thu Jul 26, 2018 12:39 pm

In 2002 Mrs Prof took out an offshore WPB with the Pru. She added a further (and slightly larger) capital sum in 2007. She is now considering encashing in whole or part, having made no withdrawals to date. Having done the rather complex topslicing calculations it seems full encashment would still leave a prohibitively large tax liability, so she is now considering part withdrawals instead. We’ve read ‘the rules’ on 5% annual withdrawals but some questions remain :

1 We understand the 5% is calculated only on the capital sum. How does that work if there has been a topup ? Is the calculation only on the initial capital sum, or can topups be taken into account ?

2 We see carryback is allowed on withdrawals, but can’t work out if this applies to the above or only to withdrawals which would otherwise breach the 5% threshold. If not, can the tax-free withdrawals be made at a higher level but over a shorter period – eg 10 annual withdrawals at 10%, rather than 20 at 5% ?

Many thanks in advance

Prof

maths
Posts: 7426
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of With Profit Bonds

Postby maths » Thu Jul 26, 2018 3:26 pm

The 5% applies to both initial and subsequent premium payment.

Not sure about reference to "carry-back" ?

professor555
Posts: 16
Joined: Sat Oct 02, 2010 6:07 am

Re: Taxation of With Profit Bonds

Postby professor555 » Tue Jul 31, 2018 9:42 pm

That's helpful, thanks.

We understand that the annual tax-free allowance can be carried back if there has been no payment in the previous year. Not sure however how carry back works if you are receiving your first payment

Prof

maths
Posts: 7426
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of With Profit Bonds

Postby maths » Wed Aug 01, 2018 12:08 pm

Carried forward, not back.

professor555
Posts: 16
Joined: Sat Oct 02, 2010 6:07 am

Re: Taxation of With Profit Bonds

Postby professor555 » Wed Aug 01, 2018 12:38 pm

Thanks for the correction. I'm presuming then that there is no beneficial effect other than the possibility to 'spread' the 5% withdrawals over a period of longer than 20 years, if one so chooses, by say missing a year and doubling-up the year after.

I'm grateful for your guidance.

Prof

maths
Posts: 7426
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of With Profit Bonds

Postby maths » Wed Aug 01, 2018 5:15 pm

It is not possible to extend the 5% reliefs beyond the 20th insurance year (ie basically, 20 years after policy started).

professor555
Posts: 16
Joined: Sat Oct 02, 2010 6:07 am

Re: Taxation of With Profit Bonds

Postby professor555 » Thu Aug 02, 2018 12:00 pm

Another eye-opener, since we assumed the 20 years started from the first withdrawal. Appreciate your valuable guidance. One very final question, if I may - if we were to start taking withdrawals at a level of higher than 5%, would relief be available on the tax-free element within the 20-year window, or would the entire withdrawal be subject to (in our case) HRT ?

Thanks, once again

Prof

maths
Posts: 7426
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of With Profit Bonds

Postby maths » Fri Aug 03, 2018 2:56 pm

The liability when a calculation event occurs is calculated by comparing the net total value of rights surrendered

maths
Posts: 7426
Joined: Wed Aug 06, 2008 3:25 pm

Re: Taxation of With Profit Bonds

Postby maths » Fri Aug 03, 2018 3:07 pm

Pressed send button accidentally.

Every time a partial surrender occurs a comparison is made of net total rights surrendered with net allowable payments. If former exceeds latter an income tax charge on the net gain arises.

So yes, the 5% reliefs would apply throughout the 20 year window.

professor555
Posts: 16
Joined: Sat Oct 02, 2010 6:07 am

Re: Taxation of With Profit Bonds

Postby professor555 » Fri Aug 03, 2018 4:29 pm

Most grateful for all your valuable guidance


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