advice on this investment

GhIFA

Capital gains tax doesn't come into it - investment bonds are potentially liable to income tax on any growth. Is your wife still a Higher Rate tax payer?

daniel80

Hi thanks for your reply, yes she is still a higher rate tax payer.We have been told that if we cash in, S W pay us out in full, and then notify the inland rev
who then decide what tax we pay. So what you are saying is that she will have to pay 40% on any profit.

GhIFA

It will be 20% on the growth - In this type of bond the Basic Rate tax is deemed to have already been paid, so she will only be liable for the additional 20% she pays as a higher rate taxpayer.

Will she be a basic rate taxpayer after she retires?

daniel80

No when she retires she will only have her state pension plus this investment. This investment was going to be used when she retires.

dunstonh

daniel80 wrote: »

Hi thanks for your reply, yes she is still a higher rate tax payer.We have been told that if we cash in, S W pay us out in full, and then notify the inland rev
who then decide what tax we pay. So what you are saying is that she will have to pay 40% on any profit.

HMRC dont decide. Self assessment means you tell them. If you leave it to HMRC and it goes past deadlines then you get penalties applied.

No when she retires she will only have her state pension plus this investment. This investment was going to be used when she retires.

This is one of the most common reasons for using the investment bond tax wrapper. The calculation for tax is deferred until a chargeable event occurs (like surrender). So, a surrender when the person is a basic rate taxpayer allows the tax to be deferred to then. Using top slicing relief, if the gain doesnt take them into higher rate tax, then there is no further tax to pay. Allowing them to avoid higher rate tax during the period they were a higher rate taxpayer.

If she surrendered it whilst she was a higher rate taxpayer than higher tax would apply.

daniel80

Thank you Dunstonh,please excuse my ignorance but as I understand it now is that there will be no tax to pay if she was a basic rate tax payer. If thats the case we could hold on until she retires to save paying tax.

jem16

daniel80 wrote: »

Thank you Dunstonh,please excuse my ignorance but as I understand it now is that there will be no tax to pay if she was a basic rate tax payer.

There will be no tax to pay if the chargeable gain does not take your wife into higher rate tax once it's added to her income for that tax year. The chargeable gain is worked out (roughly) from the total gain divided by the number of years.

She does have a 5% allowance which she could have taken out each year with no additional tax. If she has not taken any withdrawals, she could roll up her allowances and withdraw £25k with no tax to pay.

daniel80

Thanks jem16. I think I get it now. So as she has not taken anything out, after 5 years she could take out £25k [ 5% per year ] tax free. If she did this and what was left of the original investment was now not showing any gains I assume this could then be withdrawn tax free.

jem16

daniel80 wrote: »

Thanks jem16. I think I get it now. So as she has not taken anything out, after 5 years she could take out £25k [ 5% per year ] tax free. If she did this and what was left of the original investment was now not showing any gains I assume this could then be withdrawn tax free.

No it doesn't work like that.

Let's say it was £100k invested and amount at encashment was £112k. The £112k would be added to the £25k to give a total of £137k. You would then deduct the £100k giving you £37k which is then divided by the number of years to give the chargeable gain. So £37k divided by 5 = £7,400.

If that £7,400 takes your wife into higher rate tax then an extra 20% tax is payable on at least some part of the total gain.

This might help you to understand the taxation.

http://www.invidion.co.uk/investment_bond_calculator.php

My suggestion was not to avoid tax on the encashment which will not be possible until your wife is a basic rate taxpayer with no chance of the chargeable gain pushing her back into higher rate - it was just to give you an option if you wanted to withdraw some of it each year and place it into an ISA.

daniel80

Thanks jem, I now get it. I appreciate your help in explaining this.