Chargeable Event

Bossyboots

After reading the posts here I have managed to track down more information including the key features document of the actual policy. I now understand the theory but not the Chargeable Event Certificate. I have typed the details below if anyone would be kind enough to explain the bits below How your gain is worked out I would be eternally grateful. She did make a previous withdrawal and I am waiting for the paperwork tomorrow to check dates but my OH thinks it was 2003 although it might have been 2001.

Contract name - investment bond
Policyholder - MIL
Policy number - xxxxxxxxx
Commencement date - 2nd November 1993
Type of event - surrender
Date of event - 7th September 2006

How your gain is worked out

Surrender value - £3889.79
+ Relevant capital payments - £2,800
- Total investment - £4000.00 (this is what she withdrew)
- Previous gains - £1,000.00
Chargeable event gain - £1689.79
Average gain - £140.81

Information for your tax return

Tax year - 2006/2007
Has tax been paid within the fund? - Yes
Number of years - 12
Tax treated as paid - £338
Amount of gain - £1689

I am sure it makes sense but I have now spent so long working out her tax liabilities I can't see the wood for the trees. I think the only thing I am stuck on is the issue of the cumulative 5% per annum which does not seem to have been allowed for as 20% tax has been applied to the gain.

EdInvestor

The 5% is a withdrawal from the capital, not the income, thus tax free ,does that help?

schiff

From the information given, though obviously not absolutely complete, I don't think MIL has anything to worry about. The Chargeable Event is not big at £1600 odd, already has notional (non-repayable) tax attached to it and is unlikely, when added to the other income of MIL, to take her over the figure of total income (about £20K) at which her age-related personal tax reliefs are affected. I would be surprised if there was any additional tax to pay - on the assumption of course that nothing important has been missed out of what we have been told! This is only a view, the full facts would be necessary to be definite - please take this into account.

schiff

Bossyboots

The chargeable event does not take MIL over her age related personal tax reliefs so that is no problem. In fact, she still qualifies for a refund on the tax paid on her savings as she does not fall outside the 10% starting rate (by a whisker).

What I do not know is what the £2,800 capital payment is and how they have arrived at the tax figure.

Now I know she doesn't have to pay any more tax, I am trying to understand what all the figures actually mean.

cheerfulcat

Bossyboots, not sure whether this is any use to you? At least it contains some explanation of how insurance bonds are taxed and how the gains are treated, as well as a calculator.

Bossyboots

cheerfulcat wrote:

Bossyboots, not sure whether this is any use to you? At least it contains some explanation of how insurance bonds are taxed and how the gains are treated, as well as a calculator.

Absolutely brilliant. Thank you so much. What I get from that calculator is that the excess on her first withdrawal was £4,000 and the Excess on this withdrawal is £1000. Both those figures appear on her certificate.

I will play with the figures some more later and actually read the bumph (I have only done the calculator as I am supposed to be working) so that I understand the certificate but things are becoming a little clearer and hopefully tonight I will have the certificate from the first withdrawal to see if I can now follow the logic.

At the moment it looks as MIL may have overpaid tax to the tune of £250 in the years which are still available to claim back so that will be a nice little extra for her once I have sorted it all out.

EdInvestor

Investment bonds are also known as non-qualifying policies, which give rise to no income or capital gains as such in the hands of the investor, and thus provide a means of rolling up investment returns. The insurance funds in which premiums are invested are subject to life company taxation (currently 20% on income and 22% on capital gains).

Basic rate lower rate and non taxpayers should note that they are usually able to invest directly in equity unit trusts/funds or shares without paying any tax at all on their income or capital gains, and thus will be disadvantaged if they instead use an investment bond to access such investments.

Bossyboots

EdInvestor wrote:

Basic rate lower rate and non taxpayers should note that they are usually able to invest directly in equity unit trusts/funds or shares without paying any tax at all on their income or capital gains, and thus will be disadvantaged if they instead use an investment bond to access such investments.

Lecture duly given to OH and MIL. I am looking into whether MIL was missold this product now I have worked out what its all about.

Thank you to everyone who helped out on this. Between you, you gave me enough info to know what to look for and I now understand the figures (I think),

dunstonh

Lecture duly given to OH and MIL. I am looking into whether MIL was missold this product now I have worked out what its all about.

Note that the information you are noting is factually incorrect and if you complain on that basis, it would be easily rejected. Ed has chosen to ignore repeated posts by financial advisers, tax advisers and discretionary investment managers about the true position of tax on investments.

in 1993, ISAs were not available. That left PEPs. Investment selection for PEPs was not as flexible as it is with ISAs today and would have been only for £6k. So, then it was unit trusts or investment bonds. The actual taxation differences between a unit trust and a bond is not great. Although, if she was a non taxpayer up until a few years back, she would have been able to claim tax back on the unit trusts but not the bond. That would swing it back in favour of the unit trust.

The final thing to note is that if the product was purchased through a tied salesforce, then many of these didnt offer unit trusts. Therefore they didnt have to recommend them but could go straight to investment bond.

Bossyboots

dunstonh wrote:

Note that the information you are noting is factually incorrect and if you complain on that basis, it would be easily rejected. Ed has chosen to ignore repeated posts by financial advisers, tax advisers and discretionary investment managers about the true position of tax on investments.

in 1993, ISAs were not available. That left PEPs. Investment selection for PEPs was not as flexible as it is with ISAs today and would have been only for £6k. So, then it was unit trusts or investment bonds. The actual taxation differences between a unit trust and a bond is not great. Although, if she was a non taxpayer up until a few years back, she would have been able to claim tax back on the unit trusts but not the bond. That would swing it back in favour of the unit trust.

The final thing to note is that if the product was purchased through a tied salesforce, then many of these didnt offer unit trusts. Therefore they didnt have to recommend them but could go straight to investment bond.

Thanks for that. I was going to ask for some advice but I had to post quickly earlier on. This is what I was going to check out and it may be that it was all that was around but she has been a non tax payer for over 20 years so I just wanted to make sure. She keeps all her paperwork so there should be a record somewhere of why they did this one as she writes everything down. She took it out through abbey and because of the mess they made of my stakeholder pension I don't trust them to get things right. Indeed, although the policy is now run by Phoenix it looks as though they have only given the 5% allowance for this year, not the cumulative figure.

She could have managed her withdrawals better and we need to keep an eye on this.

What they have done is surrender two of the bonds that form part of her portfolio for the overall investment so she has what looks like a bonus tagged on and this together with them not using cumulative allowances has made up the chargeable gain.

Next time she is doing anything financial I will be going with her as despite being intelligent and money savvy, my OH didn't understand this properly and although I have had to spend hours researching it, I would have at least got them to go through every line of the figures while in the branch.

The other issue with the use of the bond is that when this investment was taken out FIL was still alive so they would each have had an ISA allowance but I can imagine that FIL saw the possibility of larger gains with the bond and took a risk, not imagining that he would die relatively early and leaving MIL with this tied up investment.