Mainland UK Insurance With Profit Bond effected 25 years ago with £15K - no withdrawals. Current value £105K. Now assigned equally between 3 children.
As I understand it the calculation for tax liability upon surrender is - the gain divided by the number of 'relevant' years - so for one of the children it's: £35/25 = £1400.
£1400 is then added to their taxable income for the tax year of surrender, and if that keeps them in basic rate territory then no income tax liability (as the fund was paying basic rate tax)
However, for somebody very close to the basic tax limit, I understand that if the addition of the £1400 took them into 40% territory, then their liability was 20% (40%-20%) on the amount exceeding the higher rate threshold. My query/confusion is this:- Is that liability for just for the current tax year, or is it for every year - and if so how far back - since the assignment (2 years), when the policy started (25 years)? The current owner would not have been a higher rate taxpayer for many of those years though.
So in a nutshell is there liability for just the year of surrender.
If the owner was already a higher rate taxpayer, then 20% is payable on all of the gain, but again for just this year?
Thanks
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