Claiming TAX back from bank following investment?

aidyb

Hi,

I'm a complete newbie and have searched and searched but can't find a clear answer to my problem;

In 2006 my parents gave me £30k, (From an endowment) which I didn't want as they couldn't afford to give it. I went to the Halifax and said that I wanted to put it away but ultimately wanted to give it back. Particulalry, I expected to be giving 15k back before the end of the year as I was talking my mum into buying a car.

I have just now been landed with a £2500 income tax bill which from what I can work out is because I was advised to put this money into a Personal Investment Plan rather than a current account.

I therefore have two questions;

1) Would putting the money into a current account really have avoided having to pay Income Tax?

2) Seeing as I specifically made an enquiry at the time as to whether I should should just put the money into a current account - do I have a case for claiming it back from the Halifax?

Linton

If you have been sent a £2500 tax bill presumably you have made say £12K profit.

Putting the money into a current account you would have made nothing and so paid no tax.

I think we need more info on what the PIP did and on what you have been charged tax.

dunstonh

I have just now been landed with a £2500 income tax bill which from what I can work out is because I was advised to put this money into a Personal Investment Plan rather than a current account.

If you have been hit with a £2500 tax bill this would mean that you are a higher rate taxpayer and had gains which then have to be taxed on the difference between basic rate and higher rate.

1) Would putting the money into a current account really have avoided having to pay Income Tax?

On the basis that you wouldnt have earned a penny on a current account (or amounts there were negligible), you dont pay tax on interest that you dont earn. However, any interest would be paid with basic rate deducted at source and you WOULD have to pay higher rate tax on it just as you have with the investment bond.

) Seeing as I specifically made an enquiry at the time as to whether I should should just put the money into a current account - do I have a case for claiming it back from the Halifax?

No. As you would have paid higher rate tax on the interest in the current account (or any other savings account).

aidyb

Thanks for the replies - I think a bit more info is needed for both;

I was at the time NOT a high rate tax payer. When I took £14k out to pass to my mum after getting her to buy a car, around £12k was assigned as a gain. I hear what's been said about profit but this wasn't - it was a withdrawl. I'm not sure how or why this is calculated but it DID push me into the high rate of tax threshold. I thought that if there was any tax to pay it would be on the INTEREST gained on the investment. Instead I seem to be getting taxed on practically the entire amount.

The tax man says that because the money went into an investment plan, the entire 'partial surrender' of the plan was classed as a gain. I suppose this is where I could have a massive mis-understanding but it's sounding like I should have just put the money into a current account and then not had these problems?

dunstonh

I hear what's been said about profit but this wasn't - it was a withdrawl.

If the withdrawal exceeds 5% of the amount invested (per year of investment - so no withdrawals for 2 years would allow 10%) then it creates a chargeable event for tax purposes.

it was a withdrawl. I'm not sure how or why this is calculated but it DID push me into the high rate of tax threshold.

Did you apply top slicing relief? or are you applying the full gain?

I thought that if there was any tax to pay it would be on the INTEREST gained on the investment.

Investment bonds dont pay interest. The tax is on the gain on the investment (assuming onshore bond. An offshore bond with an early capital withdrawal can actually suffer massive tax charges).

The tax man says that because the money went into an investment plan, the entire 'partial surrender' of the plan was classed as a gain.

Is it an onshore bond or an offshore bond? (tax is handled differently. What you describe is closer to offshore taxation rather than onshore). Yet you say it was Halifax and they usually did onshore bonds. it could be that HMRC think you have the wrong type of bond.

it's sounding like I should have just put the money into a current account and then not had these problems?

You wouldnt have had the tax. However, the fact tax arose is not Halifax's fault unless you told them that you intended to spend this money in the next few years. Investments are for long term. Not short term.

Did you seek advice prior to taking the capital withdrawal?

aidyb

Wow it gets complicated! I don't know if it was onshore or not. However I made it clear to the advisor (at the Halifax) that I would be spending about 50% before the year was out. I would therefore expect them to draw my attention to a potential tax bill on the gain due to it being an investment rather than a regular current account.

From what I can tell, the tax is valid I just think that the Halifax advisor probably either had commission at the front of his mind or didn't know any better.

Linton

Dunstonh - are you saying with these sorts of investments you can incur tax even if your investment hasnt actually made any money? So any cash you withdraw is treated entirely as income? If so how is that justified?

Thanks for a bit of education!

dunstonh

Dunstonh - are you saying with these sorts of investments you can incur tax even if your investment hasnt actually made any money? So any cash you withdraw is treated entirely as income? If so how is that justified?

With offshore bonds, yes.

If a partial surrender is more than the tax-deferred allowance (5% p.a.) then the excess may be liable to income tax.

If a £20,000 withdrawal was made on a £100k investment, which is worth £125k, after 3 years and taken across all policy segments, £15,000 would be within the accumulated 5% allowance and £5,000 would be an excess.

For onshore bonds the excess will be treated as carrying a 20% unreclaimable tax credit. For offshore bonds the whole of the excess will be subject to income tax at the investor’s marginal rate (s).

Instead of cashing across all policy segments but full encashment across a number of segments
Using the previous example, if a bond with 100 segments is worth £125,000, each segment is worth £1,250. If a lump sum of £20,000 is required then 16 segments would be encashed (16 x £1,250 = £20,000) leaving 84 segments remaining.

If whole segments are cashed in and there has been an overall gain on those segments (taking into account previous withdrawals and chargeable event gains), then any gain on those segments may be subject to income tax.
In the example above each segment will have made £250 gain and so the chargeable gain would be 16 x £250 = £4,000. For onshore bonds any gain made will be treated as carrying a 20% unreclaimable tax credit. For offshore bonds the whole of the gain will be subject to income tax at the investor’s marginal rate(s).

Another example if taken across all policies and not limited to individual ones
A higher rate taxpayer and invests £150,000 in an offshore investment bond with 1,500 identical segments (each with an initial value of £100). After the bond has been in force for six months, she needs to withdraw £28,000 and takes this by partial encashment. At this time, the surrender value of the bond is £153,000.

The 5% tax deferred allowance is £7,500 (£150,000 X 5%) and the chargeable gain is therefore £20,500 (£28,000 less £7,500). The gain is taxed at 40% producing a tax liability of £8,200.

So, the tax is £8200 despite the overall gain only being £3000.

notes: Investment bonds are typically made up of multiple policies. Often referred to as policy segments. You can often see these where you have the policy number and it as a 1-100 after the policy number or the policy document makes reference to number of policies. You may think you have one policy of £100,000 but actually you have 100 policies of £1000 which are clustered together to make the £100k. You can withdraw from individual polices or across multiple policies or even mix and match. Each method (or combination) can lead to different tax results.

(thanks to Scot Widows for some of the source data to allow me to copy and paste)

dunstonh

Wow it gets complicated! I don't know if it was onshore or not. However I made it clear to the advisor (at the Halifax) that I would be spending about 50% before the year was out. I would therefore expect them to draw my attention to a potential tax bill on the gain due to it being an investment rather than a regular current account.

Sounds like you have a mis-sale. An investment bond is a minimum of 5 years but ideally longer. Any investment into either an onshore or offshore bond where 50% of the money is needed in the short term is a mis-sale. You should immediatly complaint.

aidyb

dunstonh - Thank you very much for the detailed description - it's let me see my situation in a much clearer light. In particular, I'm at least going to put in a complaint with the Halifax as two major points were made; verbatim "Would I be best putting this in a current account given that I'm going to want access to a large portion of it, enough for a new car so £10k - £15k within the first 12 months?". From what you've said and I've found, I shouldn't have been sold any type of investment plan.

Linton - thanks for putting that question so succinctly, that's basically what I was asking the tax man and then getting answers that just didn't mean anything to me. Now I've seen a better presented answer I can at least follow the logic as to why a seemingly straight forward situation (small gain or actually in my case a £20 loss on the overall investment!) results in tax being applied to a much larger amount than just whatever profit over the the original sum was.

Again, thanks.

gadgetmind

Linton wrote: »

Thanks for a bit of education!

Thanks indeed.

Note that Which have just reported various banks to the FSA over exactly this practice. I think a well-worded complaint has a very good chance of success.

http://www.guardian.co.uk/money/2011/nov/16/banks-poor-investment-advice

http://www.moneysavingexpert.com/news/banking/2011/11/banks-give-poor-investment-advice

IFAs fairly better, with four out of six giving "full comprehensive advice" versus the "incomplete help" in the other two cases. (Yes, that strikes me as being a bit vague too!)

http://www.thisismoney.co.uk/money/investing/article-2062254/Banks-poor-investment-advice-90-time-investigation-finds.html