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Where Taxpayers and Advisers Meet

With Profits Bond - Top Slicing

Angelchops
Posts: 5
Joined: Sat Aug 17, 2019 5:12 pm

With Profits Bond - Top Slicing

Postby Angelchops » Sat Aug 17, 2019 5:46 pm

My 88 year old mum has held a with profits policy for 24 years which she is now trying to decide whether to cash-in. One of the things I’m helping her to weigh up is the tax liability. I would appreciate some advice on whether I have fully understood the rules on top slicing.

The policy is currently worth almost £161000 with its terminal bonus applied. We have been given a chargeable gain estimate by the company involved of almost £117000. So if she where to cash in the policy now I calculate using ‘top slicing’ across the 24 years of the policy that I would need to add £4875 to her other income in this tax year in order to establish whether this put her into the higher tax bracket. Given that her other income is around £24000 per year I’m assuming that she is easily safe as she would be nowhere near the higher tax bracket and therefore no tax would be payable on the bond. So my first question is, am I missing something important here or are my assumptions and calculations broadly correct?

My follow on question is - if she did not cash in the policy how would top slicing work if the policy came to an end when she died. This seems to be a greyer area but my understanding is top slicing would still be used to calculate her tax liability in the year of her death and the result would be broadly similar ie no tax payable on the bond. My worry here is that if this were not the case and top slicing wasn’t available then tax might be payable on the entire amount of the gain.

jerome.lane
Posts: 16
Joined: Mon Aug 12, 2019 8:41 am
Location: Camberley, Surrey
Contact:

Re: With Profits Bond - Top Slicing

Postby jerome.lane » Mon Aug 19, 2019 10:52 am

Your analysis of the income gain if policy encashed during your mothers lifetime appears correct.

If the policy is encashed post death, then there is usually no top slicing relief for the personal representatives.

This problem can be avoided by assigning the bond to the beneficiaries.

It also depends on whether the bond is an offshore or UK based one so you should seek professional advice specific to the bond and your mother's wider IHT considerations.
Jerome Lane
Tax Advisor
jerome.lane@stewartco.co.uk
Stewart&Co.
Chartered Accountants
Telephone: 01276 61203

maths
Posts: 7550
Joined: Wed Aug 06, 2008 3:25 pm

Re: With Profits Bond - Top Slicing

Postby maths » Mon Aug 19, 2019 4:04 pm

On death the policy will terminate. Any gain will be treated as the owner of the policy (ie mum) in the tax year of death and top slicing relief will in principle be point.

Angelchops
Posts: 5
Joined: Sat Aug 17, 2019 5:12 pm

Re: With Profits Bond - Top Slicing

Postby Angelchops » Mon Aug 19, 2019 4:39 pm

Thank you both,

Math - yes that had indeed been my understanding.

Anyway I phoned Aviva (the company in question) earlier and put it to them, they agreed with Jerome and offered to send through the papers to sign so we could opt to re-assign the policy on my mum’s death.

Well it’s probably academic now as mum has decided to cash-in the policy. Not just for taxation reasons, there are other family reasons we’re thinking about right now.

maths
Posts: 7550
Joined: Wed Aug 06, 2008 3:25 pm

Re: With Profits Bond - Top Slicing

Postby maths » Mon Aug 19, 2019 5:51 pm

I'm not sure I agree with Aviva.

If your mother is the sole life assured and sole beneficial owner of the policy then on her death the policy terminates and any gain is treated as part of her income for the tax year of her death i.e. she is liable (if at all) to income tax on the gain albeit subject to top slicing relief (ITTOIA 2005s.465). The PRs are irrelevant to this tax charge.

The proceeds of the policy will form part of mother's estate for IHT purposes.

The PRs only have an exposure to income tax (without the benefit of top slicing relief) if they were to cash in the bond after the beneficial owner of the bond has died but the bond continues in force because the life assured under the bond hasn''t died. The gain on encashment would then be income of the deceased's estate. In such cases it may then make sense for the PRs to assign the bond to the beneficiaries leaving it for them to encash if appropriate.

The value of the bond will vary depending upon if the gain arises on death, due too surrender etc.

Given the sums involved and the complexity of the legislation re bonds I would suggest advice is taken.

Angelchops
Posts: 5
Joined: Sat Aug 17, 2019 5:12 pm

Re: With Profits Bond - Top Slicing

Postby Angelchops » Mon Aug 19, 2019 7:26 pm

Thank you again Maths.

Yes I do tend to agree with your analysis rather than Aviva's having done my research over the last couple of weeks.

I read a similar thread to this on another forum, albeit the circumstances were slightly different, but pretty much the same two viewpoints came up - it got quite heated. In the end the chap who started the thread spoke directly to HMRC and they confirmed what you are saying.

All of this does serve to highlight however that even experts get their facts wrong so taking advice isn't always foolproof. My Mum was poorly advised by an financial expert many moons ago and it cost her dear, so we're wary these days. We listen to a variety of views - then make our own decisions.

Anyway, as I said, taxation isn't the only thing we're weighing up here, there are some personal considerations as well as some nervousness about the global financial markets.

Time will tell.

maths
Posts: 7550
Joined: Wed Aug 06, 2008 3:25 pm

Re: With Profits Bond - Top Slicing

Postby maths » Mon Aug 19, 2019 8:15 pm

The problem when speaking to HMRC, insurance companies etc is that the person to whom you may speak is often not really knowledgeable and my experience is that they often tend to shoot from the hip.

I would be interested in looking at the other discussion to which you refer if you could give me a reference.

Angelchops
Posts: 5
Joined: Sat Aug 17, 2019 5:12 pm

Re: With Profits Bond - Top Slicing

Postby Angelchops » Mon Aug 19, 2019 8:23 pm

Unfortunately I didn’t keep the reference but I’ll see if I can find it tomorrow for you. Thanks again Maths.

Angelchops
Posts: 5
Joined: Sat Aug 17, 2019 5:12 pm

Re: With Profits Bond - Top Slicing

Postby Angelchops » Tue Aug 20, 2019 8:17 am

Here you go. As I say a slightly different scenario but in essence the same issue...

https://forums.moneysavingexpert.com/showthread.php?p=74704409

maths
Posts: 7550
Joined: Wed Aug 06, 2008 3:25 pm

Re: With Profits Bond - Top Slicing

Postby maths » Tue Aug 20, 2019 7:13 pm

Thanks for the reference.

Not dissimilar confusion in the various answers which typically arises.

The issue (ignoring settled policies) typically is to identify who is the life assured and who is the beneficial owner of the policy (often the same person, but by no means not always). Confusion arises because it becomes necessary to identify whether the gain arises on the part of the beneficial owner or the PRs.

As I indicated in my. earlier post:
If your mother is the sole life assured and sole beneficial owner of the policy then on her death the policy terminates and any gain is treated as part of her income for the tax year of her death i.e. she is liable (if at all) to income tax on the gain albeit subject to top slicing relief (ITTOIA 2005s.465). The PRs are irrelevant to this tax charge.

The proceeds of the policy will form part of mother's estate for IHT purposes.

The PRs only have an exposure to income tax (without the benefit of top slicing relief) if they were to cash in the bond after the beneficial owner of the bond has died but the bond continues in force because the life assured under the bond hasn''t died. The gain on encashment would then be income of the deceased's estate. In such cases it may then make sense for the PRs to assign the bond to the beneficiaries leaving it for them to encash if appropriate.

Top-slicing relief is available if the person does not pay the higher rate of tax on other income but does so once the event gain is included OR does not pay the additional rate of tax on other income but does so when the event gain is included.

Good luck.


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