Investment Bonds, tax liability.

SilverSix

This one isn't particularly straight forward although I will try to keep it as black and white as possible.

I inherited some investment bonds which I plan to surrender and use as capital towards my house purchase this year.

The initial surrender value as of October 2010 was £104,932.

This is split up over 9 bonds, 3 of which are too small to continue and are being surrendered.

I'll list them as bond no. total value, capital gain or cash due (if surrendered)

Bond 1. 2 segments - £47,534 ,... CG = £27,534
Bond 2. 10 segments - £4,118 ,... CG =£631
Bond 4. 1 segment - £7,193, .......CG = £3,984
Bond 5. 17 segments - £28,414, ..CG = £7,817
Bond 6. 17 segments - £8,113, ... CG = £1,867
Bond 9. 10% - £4,516, ...............CG = £3,231

Bond 3. 1 segment - £1,504, CG = £220, Surrendered & cash due £1,504
Bond 7. 10% - £2,090, .........CG -£590, Surrendered & cash due £2,090
Bond 8. 10 % - £1,450, ........CG - £0, Surrendered & cash due £1,450

Before I go any further I am seeking advice from an accountant as of next week when I have more information on the types of bonds, length etc.

For my peace of mind is anybody able to give me a rough idea of what I can be expecting to receive after tax?

My salary at the moment is £22,000 which leaves me just over £15,000 of 'income' before I would have to pay higher rate tax (20% in this case due to the surrender value having already accounted for basic income tax deduction of 20%). Being due to receive roughly £5,000 in cash from default surrendered bonds my logic is:

----To partially/fully surrender in however many segments/bonds necessary the remaining £10,000 to take me up to the higher rate tax threshold.
----Then after April 5/6th surrender a further £15,000 to take me up to next years higher rate tax threshold.
----Surrender the remaining left which should be subject to top slicing.

To summarise I have £45,000 worth of gain which I am receiving £5,000 shortly. I wish to surrender a further £10,000 which included with my salary puts me just under higher rate tax. Then in the next tax year surrender the rest, a further £15,000 to push me up to the higher rate tax for next year, and pay 20% on roughly £15,000 which will be left.

£45,000
-£5,000 cash

---

=£40,000

---

-£10,000 cash to total £15,000 total surrender for this year, including the £5,000 default surrender.

---

=£30,000

---

-£15,000 cash next tax year

---

= £15,000 which is subject to higher rate tax as it will be next years income at a further 20%.

This would suggest around £3,000 in tax? so should leave me with roughly £102,000. Does this sound about right? I know there are lots of variables and it may well be impossible to advise me.

I'm getting to grips with 'top slicing' which my accountant will have to deal with.

I'm quite young and am trying to put my mind at rest that I won't be landed with a tax bill which would result in the need for a slightly larger mortgage. Initially my solicitor thought these were going to be liable for CGT but it's never simple is it!

Thanks in advance!

Ben

Edit: Should it benefit me to leave the remaining £15,000 invested I could have a small family loan from my mother, which would save me paying tax. Then in the tax year after next I can surrender the £15,000 or the amount it has grown to to push me up to the higher rate tax threshold for the 3rd year running and repay my mother. (Assuming my salary hasn't increased and that anything the £15,000 has grown over £15k will be subject to 20% tax) This should also save me a fair bit on the accountants bills.

SilverSix

I have discovered that the term for bond 1 has been 15 years. Giving me (top sliced) an extra £1835 annual income which would not push me in to higher rate tax and there would be nothing further to pay.

The rest I have assumed a 5 year minimum term for the bonds which would mean that my total annual profit over the entire amount (after top slicing the gain divided by 5 years and all totalled together) is around £7,000 which would mean I have no tax to pay on the entire amount?

Does this sound right? or too good to be true? :eek:

dunstonh

If the amount added to income after top slicing relief doesnt take you in to higher rate tax then you have no further tax to pay.

SilverSix

dunstonh wrote: »

If the amount added to income after top slicing relief doesnt take you in to higher rate tax then you have no further tax to pay.

And any amount that you are over/in to the higher rate tax bracket, that amount is then multiplied by how many years the bond term lasted and then that amount is taxed at 20%.

For example if you're earnings for the year are £39,500, £37,500 salary plus a £2,000 gain from a bond of 10 years after top slicing. Then you'll pay 20% on £20,000 (£2,000 x 10 years) so would have £4,000 in tax to pay.

Just to clarify my understanding of top slicing.