Cashing in personal investment bonds, is that taxed?

peterplan

Hello,

I have an interest only mortgage and setup a saving for it with a personal investment bond with prudential.
Now that the end mortgage is coming up I am thinking of cashing in the bonds before the financial market might crash.

Question I have on it is what are the tax implications on this?
I understand that prudential sends cashing in events to the tax department in the UK.

Any experiences or advice?

Loughton_Monkey

What sort of bond? Single premium? [often known as 101 bonds]. The word 'bond' is much mis-used and it's important to know exactly what you have. If it was a regular premium policy, lasting over 10 years, then it is more likely to be a 'qualifying' policy and not liable to spit out a chargeable event.

peterplan

On the policy it shows as: Personal Investment Bonds

dunstonh

is it an onshore bond or an offshore bond?
Is it non-qualifying or qualifying?
Are you are basic rate taxpayer (or lower)?
would the gain after top slicing relief take you into higher rate tax?

Pru actually had some fixed term deposit accounts some years ago which would actually no doubt be called bonds nowadays given the currently marketing trends to misname everything as bond.

peterplan

It was a bond taken out with Scottish Amicable European.Place of payment is mentioned as Ireland.

Looks like there is a tax free withdrawal of 5% per year of the initial investment value.

dunstonh

Ok, it looks like an offshore bond then. Not an onshore bond.

Are you UK resident for tax purposes?

If so, then there will be a tax bill when you create a chargeable event (full surrender for example). Offshore bonds incur no taxation whilst invested (As long as no chargeable event occurs). You pay the tax when you surrender (or other chargeable event).

Loughton_Monkey

OK, but they are not what I would call a 'normal' vehicle for mortgage repayment.

If it is as I think it is (and someone may correct me), this is one of those 101 bonds, which makes it (technically) Life Assurance. In effect, though, it is a series of 'single premium' investments as opposed to a 'regular' premium contract. The latter would normally be totally free of tax on maturity.

The position with 101 bonds is a bit more complex. Rather perversely, I think they become subject (potentially) to income tax rather than capital gains tax. There is something about the right to withdraw 5% each year free of tax liability - with unused withdrawals carried forward. But I am no authority on exactly how the taxation works, I'm afraid.

jamesd

Normal treatment for an offshore insurance bond is 5% tax free withdrawn per year and the limit for past years can be accumulated if not taken. So if you have not taken any you may be able to meet your objectives by withdrawing the accumulated 5% allowances or part of them.

Such bonds normally have a range of investments available within them and it may well be to your interest just to change investments rather than sell everything and pay the tax. Dunstonh has asked the appropriate questions about your tax situation. This top slicing calculator may be of interest. It's probably qualifying but you should confirm this.

You may well have a series of individual bonds that would let you cash only some of them to limit the potential adverse tax effects of doing them all in one tax year.

Normally you'd want to take these out while a higher rate tax payer and cash them in after retirement when you're a basic rate tax payer. That then saves you tax on the gains made within the bond, since you pay it all only at the end and your tax rate at that time, though the gain on the bond can change your rate if it's big enough.