Help - I don't understand tax!

Linglethouse

Hi

I have a 2 ISAs and 2 Bonds which I am looking to cash in as I want to buy my first house this year.

Cashing in the ISAs seems quite straight forward, but when it comes to doing the same for my Prudence Bond from Prudential it all seems a bit harder as it has started to talk about tax!

Because this bond is treated as a life assurance policy cashing it in may make it liable to higher rate income tax - can anyone help advise me on what I should be doing to ensure that I don't end up loosing lots of my hard earned investment to tax!

Thanks

BoGoF

Are you already a higher rate taxpayer ? If so then any 'chargeable event gain' on your policy will be liable to a further 20% income tax - normally the gain is treated as having paid notional 20% tax.

If the CEG takes you into the higher rate tax bracket then furthet tax may be due. Depends on the number of years the policy has been in force - you get what is called top slicing relief that reduces the liabilty.

Remember the full amount of the money you will not receive is the not the taxable amount - only that over and above your capital paid in.

Linglethouse

The amount over and above the capital I paid in is £4,050. I am currently a lower rate tax payer and have had the policy for 10 years.

I get the impression that top slicing would help, but does this mean I can only take out some of the money?

Linton

Linglethouse wrote: »

Hi

I have a 2 ISAs and 2 Bonds which I am looking to cash in as I want to buy my first house this year.

Cashing in the ISAs seems quite straight forward, but when it comes to doing the same for my Prudence Bond from Prudential it all seems a bit harder as it has started to talk about tax!

Because this bond is treated as a life assurance policy cashing it in may make it liable to higher rate income tax - can anyone help advise me on what I should be doing to ensure that I don't end up loosing lots of my hard earned investment to tax!

Thanks

I have some money in these bonds. My understanding is .....

If you cash them in you are not liable for any basic rate tax. You would be potentially liable for the difference between basic and higher rate tax (20%) on any PROFITS (not the whole amount!) you make from the sale.

So unless you are a higher rate tax payer now and/or have a very large amount of money in these bonds it is unlikely to be a problem.

Note that the Pru impose early cash-in penalties if you have held the bonds for less than 5 years.

If the profits from the sale would move you from standard rate tax into higher rate tax then you could consider splitting the sale over two tax years - take half now and half in a months time.

BoGoF

Linglethouse wrote: »

The amount over and above the capital I paid in is £4,050. I am currently a lower rate tax payer and have had the policy for 10 years.

I get the impression that top slicing would help, but does this mean I can only take out some of the money?

No, you can take out all the money and as long as the £4050 doesn't take you into the 40% tax band there will be no tax to pay.

Linglethouse

Hi

So, I cashed in my bonds and have received a "Chargeable Event Certificate" which says that my gain should be disclosed in my next self assessment tax return.

I have never done a tax return before, if I apply top slicing to the amount it doesn't take me into 40% tax so do I still need to do a tax return?

Help!

Reaper

Linglethouse wrote: »

if I apply top slicing to the amount it doesn't take me into 40% tax so do I still need to do a tax return?

I don't think you are using the term top slicing correctly here. Provided you do not believe you have any higher rate tax to pay there is no need to ask to do a tax return. Hang on to the details though in case the encashment prompts the tax man to ask you to fill one in.