Chargeable Event

Bossyboots · 12 September 2006 at 7:23PM

Can someone please help me out on this? My MIL has just withdrawn some money from an Investment Bond. This has caused a chargeable event which is fine, we understand that.

However, on her certificate it says "Tax treated as paid". As far as I can see from the hmrc website it describes the actual position.

This is at odds with what abbey told her, although I wasn't there and my OH had misunderstood most of it himself as well.

Can someone just clarify for me that the tax on the chargeable event is not a separate tax liability she has to pay. If this is right, does this mean it is paid from her investment direct from abbey or how does this work?

Assuming it has been paid, it has been paid at 20% but she is only a 10% rate taxpayer which seems rather unfair as you cannot claim it back.

dunstonh · 12 September 2006 at 9:44PM

A chargeable event does not get the tax paid on the policy. It is dealt with via the tax return.

It applies to higher rate taxpayers or borderline higher rate. A lower rate taxpayer can totally ignore it.

EdInvestor · 13 September 2006 at 11:19AM

Here's a typical example of a couple of the problems with investment bonds.

1)They are opaque: people don't understand what they are investing in

2)They are very prone to misleading sales information: people think their gains are are tax free, like ISAs, when they are not.They think they are getting tax free "income", when in fact their money is withdrawn from their capital.

dunstonh · 13 September 2006 at 11:27AM

What you mean is that you dont have a clue so believe that no-one else does either.

You have just accused everyone of not knowing how ISAs, Unit Trusts/OEICS, pensions or SIPPs work. As investment bonds can work exactly the same way from an investment point of view.

What is the difference in investing in Invesco Perpetual income fund whether it is inside a OEIC, ISA, Pension or Investment bond tax wrapper?

As for income, some may not understand the exact terminology but that doesnt make the product bad. Most people dont know how engines work but they know their car will get them from A to B.

Your continued posting on a subject you know little or nothing about is not fair on other posters to this site who may believe you do understand the subject.

EdInvestor · 13 September 2006 at 11:40AM

Here's a reasonably clear explanation from another IFA.

cheerfulcat · 13 September 2006 at 11:42AM

dh, I for one would be extremely grateful if you could outline just how investment bonds do work, so that this can be laid to rest once and for all. Also, you say -

What is the difference in investing in Invesco Perpetual income fund whether it is inside a OEIC, ISA, Pension or Investment bond tax wrapper?

which puzzles me a little since AIUI the UT/OEIC part refers to the structure of the fund while the others are in fact wrappers?

Chrismaths · 13 September 2006 at 12:00PM

So you can substitute the word "directly" for OEIC. But an OEIC is still a wrapper - it's a wrapper for the underlying holdings of the fund. In this case the tax treatment is that the fund doesn't pay corporation tax on capital gains, instead the investor pays CGT on the overall growth of the holdings. But of course you can put this wrapper (ie an OEIC) within many other wrappers - SIPP/Personal Pension/investment bond/offshore investment bond/ISA/PEP/another OEIC (fund of funds) et alia.

Any one want a game of pass the parcel?

Here's a reasonably clear explanation from another IFA.

Reasonably clear: yes. Factually correct: no.

For a start, a higher rate tax payer pays 20% extra of the net gain (ie a rough effective tax rate of 36%). But top slicing (which is what he was failing to describe) works by dividing the net gain by the years it has been held for (ie £50,000 over 10 years gives £5,000) and then adding this your income. If this takes you over the HR threshold by say £2000, you then multiply £2000 by 10 years again, and pay 20% tax on £20000.

Another taxation point I forgot to raise before was that investment bonds still get indexation allowance instead of taper relief - indexation is much more valuable.

dunstonh · 13 September 2006 at 12:12PM

which puzzles me a little since I understood that the UT/OEIC part refers to the structure of the fund and that the others are in fact wrappers?

The UT/OEIC is the natural fund. That is the "naked" investment in its true sense.

Whenever you are looking at trustnet, morningstar etc for performance figures and data, you are looking at the unit trust/oeic itself.

You can then purchase the fund inside a packaged product. We refer to these most commonly as tax wrappers. These typically are ISAs, Investment Bonds and Personal pensions. The tax wrapper may or may not contain a level of charges. For example, some ISA providers add a charge on the ISA as do bonds and SIPPs whilst others do not. You cannot accuse one tax wrapper of that without implicating all them. Just like any retail product, you can by variations of the same thing at different costs. A CD player still plays music regardless of how much you paid for it. So picking the same unit trust fund in all the different tax wrappers will result in the same performance with the exception of tax and charges differences.

dh, I for one would be extremely grateful if you could outline just how investment bonds do work, so that this can be laid to rest once and for all.

Not a bad idea. Something for a new thread i think rather than an existing one.

Bossyboots · 13 September 2006 at 1:07PM

dunstonh wrote:

Not a bad idea. Something for a new thread i think rather than an existing one.

Actually I don't mind if you put it here as I would like an explanation too. I know nothing about this investment and having my MIL and OH running round like headless chickens thinking she has to pay over £300 to the taxman because she made a withdrawal has not been amusing.

schiff · 13 September 2006 at 4:45PM

Something that hasn't been mentioned so far - we seem to have got away from the original topic in all this useful talk about investment bonds etc - is the tax implications for people of 65+ who normally would get the full age-related personal tax reliefs. (It may not of course be relevant to the original poster's MIL but I think it needs mentioning).

I have a client in his 70s who cashed in an Investment Bond without mentioning it to me first. It was to pay for his daughter's wedding and to close it down, as there was not much left in it. It had done very well for him (I suppose that was the one silver lining in what was going to hit him shortly!)

The impact of the sizeable Chargeable Event wiped out the whole of his age-related personal relief and the whole of his Married Couple's Allowance for the year - normally worth hundreds. And he had other investments in shares to sell as an alternative!

schiff

Bossyboots · 13 September 2006 at 6:25PM

schiff wrote:

Something that hasn't been mentioned so far - we seem to have got away from the original topic in all this useful talk about investment bonds etc - is the tax implications for people of 65+ who normally would get the full age-related personal tax reliefs. (It may not of course be relevant to the original poster's MIL but I think it needs mentioning).

I have a client in his 70s who cashed in an Investment Bond without mentioning it to me first. It was to pay for his daughter's wedding and to close it down, as there was not much left in it. It had done very well for him (I suppose that was the one silver lining in what was going to hit him shortly!)

The impact of the sizeable Chargeable Event wiped out the whole of his age-related personal relief and the whole of his Married Couple's Allowance for the year - normally worth hundreds. And he had other investments in shares to sell as an alternative!

schiff

This is where I was trying to go with my question. MIL's pension and interest on her ordinary accounts takes her £369.72 over her personal allowance. This means that she has overpaid tax of about £50 in the last tax year as she has paid tax on her savings at 20% but is only in the 10% band. However, she took a sum from the bond sometime last year and again last week.

Can you explain to me exactly how this is treated by the taxman? Do I have to treat the amount of the gain as income for the year and set that against her personal allowance? If this is the case can I then take it that the "tax treated as paid" is not something she physically has to pay. I know it is not recoverable but I think she may still be fractionally under the 22% tax band.

Sorry Edinvestor I missed your post. That link explains it really well and has set me on another path as MIL was not told about carry over and it certainly would have applied to the first withdrawal she made. Also it states that only the average figure is added to the income for the year of the withdrawal. Does anyone else agree with that? The certificate gives a figure for the chargeable gain event and then an average gain.

Chargeable Event

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