CGT and with-profits

Legacy_user

My dad has a few with-profits bonds he is considering selling, but wanted to check what CGT liabilities he may face.

He has had all of the policies >20 yrs and the 'gains' he has made would take him over the 10.6k annual CGT limit, if this applies.

He is retiring in april and is currently a basic rate tax payer.

Would CGT apply, or does this depend on his taxable income or is there some sort of exemption for with profits bonds? (note he has never drawn an income from the bonds).

Many thanks

xylophone

http://www.pru.co.uk/pdf/INVS0002.pdf
http://www.seniorsnetwork.co.uk/money/profitbonds.h
this type of thing?

John_Pierpoint

http://www.seniorsnetwork.co.uk/money/profitbonds.h

http://www.seniorsnetwork.co.uk/money/profitbonds.htm

System

Thanks very much for this information, very helpful.

In summary, from what I understand, as you are allowed to withdraw 5% per annum without tax liability and this is cumulative (i.e. 10% in yr 2 if no withdrawal after year 1), then because my dad has had these bonds > 20years, he could safely encash the entire bond without any tax implications (even if this took him into the 40% tax band for the year?).

Or does this mean he could withdraw his initial investment free of tax liability but if the profit took him into the 40% tax bracket this year he would be liable for tax on that?

Thanks

nomunnofun

Firstly it is income tax, not CGT.
The simplest way to ease your mind is to telephone the company and ask if, upon encashment, there is a chargeable event. If there is, there will be no further liability if your father is a basic rate taxpayer - if higher rate he will have a further 20% liability ( I note that the links above appear to indicate a basic rate of 22% - old articles perhaps?). The basic rate tax is not reclaimable.

If there is no chargeable event, as is most likely, there is nothing further to worry about.

Dazed_and_confused

Is isn't that simple.

OP states his dad is basic rate taxpayer due to retire in April.

Given the moveable feast that retirement had become the OP's dad could be currently entitled to full age related allowances but the chargeable event may mean these are lost due to the, albeit one off, increase in "income".

There may not be extra tax due on the event itself but loss of full age related allowances could generate a tax bill of approx £500 this year.

Without full facts impossible to know what the ultimate consequences will be.

nomunnofun

Dazed_and_confused wrote: »

Is isn't that simple.

OP states his dad is basic rate taxpayer due to retire in April.

Given the moveable feast that retirement had become the OP's dad could be currently entitled to full age related allowances but the chargeable event may mean these are lost due to the, albeit one off, increase in "income".

There may not be extra tax due on the event itself but loss of full age related allowances could generate a tax bill of approx £500 this year.

Without full facts impossible to know what the ultimate consequences will be.

Yes - I realised that but the effect on age allowance would be minimal, I believe, given the huge benefit of top slicing relief in this case - twenty years holding. I did not think that it merited a mention but your point is very relevant.

System

Thanks for your replies.

I had not considered 'top slicing' relief. Because of the length of time my father has had the bonds (>20 years), his gain is likely to be in the hundreds rather than thousands (I don't think they have done much better than inflation, if at all!).

I do not know exact details of what my dad has earned this year (he doesnt tell me everything of course!), overall I reckon he is at least £10,000 away from the 40% tax bracket and therefore because of the 'top slicing' I am now not concerned.

He does have another bond (I don't know what type of bond but definitely not with-profits) in which he has made >10k (albeit over many years). This will therefore be subject to CGT, so he plans to sell part of it this year and part next year to use his 10.6k allowance in both tax years, although he hasn't really given me much information about this. He seemed far more concerned about the with-profits funds as is keen to move the money to something more productive.

jimmo

nomunnofun wrote: »

Yes - I realised that but the effect on age allowance would be minimal, I believe, given the huge benefit of top slicing relief in this case - twenty years holding. I did not think that it merited a mention but your point is very relevant.

Age allowance is calculated by reference to income and the full amount of the chargeable event gain.

Top slicing relief is then calculated by reference to rates of tax only. Age allowance is not reworked in the top slicing relief computation.

http://www.hmrc.gov.uk/manuals/iptm/IPTM3820.htm

System

jimmo wrote: »

Age allowance is calculated by reference to income and the full amount of the chargeable event gain.

Top slicing relief is then calculated by reference to rates of tax only. Age allowance is not reworked in the top slicing relief computation.

http://www.hmrc.gov.uk/manuals/iptm/IPTM3820.htm

Thanks for this, this does complicate matters. So what you are saying is that top slicing is not taken into account for this part. If my dad was close to the £25400 income limit for the age related personal allowance, the full amount of the gain (irrespective of years the bond has been held) would be added to income. E.g. if made 20k profit this would be added in full to his income (e.g 25k) to make an overall income of 45k. This would reduce his personal allowance back to the basic £8105? Am I understanding this correctly?

jimmo

teepee83 wrote: »

If my dad was close to the £25400 income limit for the age related personal allowance, the full amount of the gain (irrespective of years the bond has been held) would be added to income. E.g. if made 20k profit this would be added in full to his income (e.g 25k) to make an overall income of 45k. This would reduce his personal allowance back to the basic £8105? Am I understanding this correctly?

Absolutely correct, which is why Dazed and confused suggested a tax bill of about £500.

The difference between age allowance and standard personal allowance (10500 - 8105) = ££2395 @20% = £479.