Tax query on investment bond

Ian_W

In February 2009 my mother-in-law passed away leaving her estate to my wife and her brother who were also joint executors of her Will. The estate was well under the IHT limit and they employed a local solicitor, with the estate final distribution in August this year.

The estate consisted of her house (sold within 6 months), cash in deposit accounts, a few shares (<£200) and an Investment Bond valued at about £27,000 when surrendered. When the solicitor made the final distribution my wife was asked to sign a tax return and receive any income tax refund due on behalf of her brother and herself.

We recently received a form P800T and almost all was as expected in respect of her income but included in the list was an item “Chargeable Event Gain” for approximately £10K less that the value of the Bond/shares. There is no explanation as to how the figure is arrived at but I presume this relates to a Capital Gains charge from the sale of the Bond and shares.

The bond was purchased in 1986 with a lump sum investment of £10K (TBC), as far as I am aware no income was ever taken. On these threads I’ve seen IBs described as “tax wrappers” so my first question is whether CGT is applicable on the surrender of the Bond?

Supplementary to that, if it is chargeable:
1. would the personal CGT allowance apply (c £9.8K in 08/09?)?
2. Would indexation and taper relief be claimable?

Any advice welcome and appreciated.

dunstonh

We recently received a form P800T and almost all was as expected in respect of her income but included in the list was an item “Chargeable Event Gain” for approximately £10K less that the value of the Bond/shares. There is no explanation as to how the figure is arrived at but I presume this relates to a Capital Gains charge from the sale of the Bond and shares.

Investment bonds are exempt from capital gains tax. Indeed, that is one of the key benefits of the investment bond tax wrapper (one of the few it has left as it doesnt have the advantages it once had).

Chargeable gain only applies to higher rate taxpayers or those that are basic rate but the gain, after top slicing relief takes them into higher rate.

Take the gain (add in any withdrawals made), divide it by the complete number of years and add that to the income. If your mother in law was still a basic rate taxpayer after that then there is no further tax to pay.

roger_c

If it is was an offshore IB then there may tax payable whether or not she is a basic rate tax payer or not.

Ian_W

Don't think it's offshore - an Eagle Star Rainbow Bond sold by Lloyds if that helps.

Putting 2 and 2 together at the moment as I'm waiting for the solicitor to send a copy of the redemption statement and the tax return. However, I suspect the total return, rather than the gain, has been used and the Revenue have simply deducted her personal CGT allowance before arriving at the Chargeable Event Gain figure. Could be making 5, but that's what it looks like to me.

Elaine_Wilson

I think you have got 5.

This bond should have nothing to do with capital gains tax so you can ignore the annual exemption.

The chargeable event gain should be the total proceeds less the initial investment which, as you say, was about £10,000. This "gain" is treated as income net of basic rate tax and any higher tax is subject to top-slicing as has already been mentioned.

John_Pierpoint

Would this be one of those bonds where the owner takes up to 5% a year "tax free" (its not tax free because the corporation (insurance company) has paid tax on the fund?).

Mother-in-law dies in February some 10 months or so into the tax year, with a full set of personal allowance and extra age allowance for her final tax return.

However her death "forces" M-I-L to accept all the remaining gain as income?

Would someone like to define how "top slicing" works in this situation?

John.

PS For what it is worth, when "Mr Dog" died in similar circumstances, he did not have one of these "Insurance" bonds, just one of those over-50K-bonds from a clearing bank, that pay gross interest. In my case I never got any sort of calculation just a modest refund that was more than I was expecting. Ah well let sleeping dogs lie.

dunstonh

an Eagle Star Rainbow Bond sold by Lloyds if that helps.

Come across those a few times. Not so much nowadays though. However, onshore bond is the case.

However, I suspect the total return, rather than the gain, has been used and the Revenue have simply deducted her personal CGT allowance before arriving at the Chargeable Event Gain figure.

The insurance company provide a chargeable gain figure on surrender. However, CGT shouldnt come into it anywhere. Only the potential for additional income tax if the gain after top slicing relief took her into higher rate tax.

Would this be one of those bonds where the owner takes up to 5% a year "tax free" (its not tax free because the corporation (insurance company) has paid tax on the fund?).

It is. Although there is no corporation tax on income within the fund and the life companies still benefit from taper relief. So, for larger investments, the wrapper can still be potentially suitable. Still oversold by banks or on-their-way-out-by-2012 advisers.

Would someone like to define how "top slicing" works in this situation?

Its the number of complete policy years with onshore bonds.

Ian_W

John_Pierpoint wrote:

Would this be one of those bonds where the owner takes up to 5% a year "tax free" ...

As stated earlier, AFAIK no income was ever taken.

Elaine_Wilson wrote: »

I think you have got 5.
This bond should have nothing to do with capital gains tax so you can ignore the annual exemption.

Point taken, I've altered the title of the thread. I thought we may have declared the proceeds in the wrong box and triggered CGT because of the wording about gain and chargeable event, my mistake.

But which of these is correct?

Elaine_Wilson wrote:

The chargeable event gain should be the total proceeds less the initial investment which, as you say, was about £10,000. This "gain" is treated as income net of basic rate tax and any higher tax is subject to top-slicing as has already been mentioned.

dunstonh wrote:

Take the gain (add in any withdrawals made), divide it by the complete number of years and add that to the income. If your mother in law was still a basic rate taxpayer after that then there is no further tax to pay.

Neither takes her income into HR tax but the former takes her well beyond the Age allowance threshold so that all her additional allowance is clawed back and she's left with the standard £6035 personal allowance.

dunstonh

Neither takes her income into HR tax but the former takes her well beyond the Age allowance threshold so that all her additional allowance is clawed back and she's left with the standard £6035 personal allowance.

The age allowance would be removed/reduced if the gain after relief takes her over the age allowance reduction figure.

Elaine_Wilson

I don't see, and certainly didn't intend, any contradiction with the post by dunstonh. I was trying to avoid duplicating the information he provided so may have been a bit vague.

Perhaps a better way of describing top-slicing would be -

Divide the gain by the number of relevant years.
Add this fraction of the gain to her income and recalculate her tax liability.
If the liability is increased then the tax due is the amount of the increase multiplied by the number of relevant years.

Ian_W

Elaine_Wilson wrote: »

I don't see, and certainly didn't intend, any contradiction with the post by dunstonh. I was trying to avoid duplicating the information he provided so may have been a bit vague.

The reason I asked the question was that your "shorthand" explanation actually describes perfectly what I think we have done. Both yourself and dunstonh are extremely knowledgeable and helpful posters to whom I am extremely grateful for taking the time to post answers, so I had no wish to seem to pit one against t'other!!

Still no paperwork from the solicitor so I'm still putting 2 and 2 together but hopefully getting nearer to 4!! A is what I think has happen and B is what I think you are telling me should have happened.

A: MIL income in tax year to her death is £14,000 add to this declared gain of £18,000 (treated as tax paid) = £32,000. There is no HRT but income declared means age allowances (she was 82) are withdrawn completely which leads to c£500 underpaid tax.

B: MIL income in tax year to her death is £14,000 add to this declared gain (£18,000/22 completed policy years) of £820 = £14,820. Age allowance remains intact and there is probably overpayment of tax.

If the above is correct and confirmed by the paperwork then I suppose the way forward is to write to HMRC explaining the mistake and asking them to amend the original return. In fairness this was completed by the probate solicitor and my wife had no reason to query it before signing it.

Tax is not my specialist subject - hence the need to ask the audience!