Minimisng tax liability on with-profits bond.

Clenched_buttocks

In 2001 took out a With-Profits bond of £50,000 for myself and my wife in a joint account. To draw now it is worth £77-78k. If I draw the money out I will be subject to tax on the difference (£28k) for 2012-13 for my half of the interest payable (£14,000).

My tax code is 1085T. My personal allowance £10,660. My married couples allowance is £3,853, giving a total of £14,513. My income for year 12-13 will be with pension & income will approximately £16,000.

So with a view to avoiding as much tax as possible what would be my best option?

Note: I am able to spread this over two years (to mitigate the tax liability) but leaving the sum where it is will only receive a poor rate of interest.

Thanks in advance for any help offered.

CB

jem16

Clenched_buttocks wrote: »

In 2001 took out a With-Profits bond of £50,000 for myself and my wife in a joint account. To draw now it is worth £77-78k. If I draw the money out I will be subject to tax on the difference (£28k) for 2012-13 for my half of the interest payable (£14,000).

What you have is an Investment Bond and tax is handled differently as it's an investment and not savings. You have been paying tax all the while the money has been invested in the bond and further tax is only due if you are a higher rate taxpayer ( or the gain after top slicing takes you into higher rate tax)

Basically the gain is £28k but this is then divided by the number of years you have held the Bond. So £28k divided by 11 equals £2545.45. As it's joint your liability is £1272.72.

That is then added onto your income for the year. If you are still within the basic rate of tax, you have no further liability to tax on your Bond.

As £16k plus £1272.72 is only £17,272.72 you have no tax to pay.

This will help explain it.

http://www.pru.co.uk/pdf/investments/INVS0002.pdf

webmasterpolo

Hi

You mention married couples allowance and a high tax code indicating you're other 75. This means you will fall into the age allowance trap as your half of the full gain will be added to your income, and if this pushes you over the max income allowance around £25000 which this will you will lose some/all of the enhanced personal allowances and in effect pay more tax. Your wife may well be the same depending on her income.

Tax efficient options include:

1. Straddling the tax year with a partial withdraw in each.
2. Assignment to your wifes name - in this case you will probably have to do a partial withdraw for you first to bring down the gain, the idea being when she surrenders it there is no loss of age allowance. You can't then re-invest in your name with this money.
3. 5% annual withdrawals defer tax and may be able to take advantage of previous years you didn't draw out depending on the policy.

There is probably more but that's off the top of my head.

You should consider if surrendering is the best option at all, if you need the money that's one thing, if you're going to put it in the bank and leave it alone, then perhaps this isn't the best move.

Look at this:

http://www.telegraph.co.uk/finance/personalfinance/investing/8561606/With-profits-bonds-should-I-stay-or-should-I-go.html

-Web

jem16

webmasterpolo wrote: »

This means you will fall into the age allowance trap as your half of the full gain will be added to your income,

Didn't realise that the full gain was used in this instance. Thanks for pointing it out.

3. 5% annual withdrawals defer tax and may be able to take advantage of previous years you didn't draw out depending on the policy.

That might be the ideal method. If nothing already taken that would allow £27,500 withdrawn with no tax liability.

Clenched_buttocks

Thanks very much indeed for your help in this matter. I have read Jem16’s link to the Pru PDF – very useful. The telegraph item I have on file thanks, WMP. I am still though a little confused as to the tax implication and whether the full gain has been used in this instance.

webmasterpolo wrote: »

Hi
You mention married couples allowance and a high tax code indicating you're other 75. This means you will fall into the age allowance trap as your half of the full gain will be added to your income, and if this pushes you over the max income allowance around £25000 which this will you will lose some/all of the enhanced personal allowances and in effect pay more tax.

Yes, you are quite right, WMP, I am 84 and still a little baffled as to why the accrued sum cannot be spread out over the life of the bond. When I originally invested the sum I was not aware of any subsequent tax implication on its maturing. :question:

jem16

Clenched_buttocks wrote: »

I am still though a little confused as to the tax implication and whether the full gain has been used in this instance.

Unfortunately, although the top slicing relief calculates any tax due on the chargeable gain ( ie on encashment) to be zero, the full gain ( in your case £14K ) is used to determine your total income for the year in relation to whether or not you receive your age related allowance.

As the £14k gain plus your income of £16k gives you a total income for the year of £30k you are going to lose some of your age realted allowance. The limit is £25,400 to get the full allowance and you are £4,600 over it. That will mean you will lose £2,300 of your allowance which means an extra £460 of tax due on your income because of the smaller tax-free allowance.

Have you made any withdrawals over the life of the Bond?

Yes, you are quite right, WMP, I am 84 and still a little baffled as to why the accrued sum cannot be spread out over the life of the bond.

Technically it has been. However it affects your age related allowance as it counts as income for the year it is encashed.

When I originally invested the sum I was not aware of any subsequent tax implication on its maturing. :question:

You should really have been made aware.

Who advised the Bond? If an IFA can you not see that IFA to ensure you can minimise any tax implications by using one/some of the methods WMP suggested?

Clenched_buttocks

Thanks, jem16. That has put everything in pretty straightforward terms.

Despite what the IFA said it is probably best to cash-in the bond and pay the £460 tax. Would the tax be due on encashment immediately or at the end of the financial year?

jem16

Clenched_buttocks wrote: »

Would the tax be due on encashment immediately or at the end of the financial year?

If you were to encash it during this tax year, it basically affects your age related allowance for this tax year.

What you would need to do is phone HMRC and tell them that your total income is going to be £30k and they would alter your tax code for the rest of the tax year.

Basically you would pay the extra tax monthly between now and the end of the tax year although you may still owe some if they put you on a non-cumulative tax code.

You really could avoid this tax though.