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Where Taxpayers and Advisers Meet

With profit Bonds - taxation on surrender

kiloware43
Posts: 6
Joined: Wed Jan 14, 2015 9:20 am

With profit Bonds - taxation on surrender

Postby kiloware43 » Mon Jul 08, 2019 3:57 pm

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

TW1234
Posts: 21
Joined: Sat Jan 07, 2017 11:42 am

Re: With profit Bonds - taxation on surrender

Postby TW1234 » Thu Jul 11, 2019 11:48 am

There is more to the calculation, and you need to research "Top Slicing" relief.
The HMRC site has guidance.

However this is not a fully equitable tax as there can be winners and losers. (As you indicate)
This gives some opportunity to avoid the consequences by encashing when a low rate tax payer but can bring additional tax to be paid if becoming a higher rate payer.
Manipulation of income in the year of encashment may be possible to maximise the opportunity, but in a "classic" situation of the bond being held by a spouse with no income until the other dies and they "inherit" a large income (eg Pension) the inequity does arise.


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