Chargeable events and Income tax

fwor

I'm just starting the process of selling some managed funds (all either OEICs or UTs) that I invested in 10 years ago, to swap them for index trackers with lower fees. The potential problem is that these funds have (as you would expect) made significant gains in a decade.

When I last asked about this I was told that gains from this type of fund are subject to income tax (not CGT as I had thought at the time), and that they are already internally taxed at income tax base rate.

Is it simply the case that I need pay no further tax on these gains provided they, plus all my other income, do not exceed the higher rate income tax threshold (currently £41,865)?

Last time I asked, it was suggested that the situation is more complicated than that, but I don't know what the complications could be.

I have no other income at the moment so, on the face of it, it seems I need pay no more tax unless the chargeable event gains add up to more than the higher rate threshold. Is this correct?

le_loup

Selling share, units, or whatever creates a chargeable event for CGT unless held in an ISA. There is a £10K or so allowance.

Your_Hero

That counts as a disposal for CGT purposes. The dividends received are counted as income (10% notional tax credit, therefore nontax payer and basic rates have no further liability unless pushed into higher rate tax).


You have a CGT allowance of £11,000 in 2014/15. Losses can be used to offset gains in the same year.

The excess is added to your income for the year and if you are under the HRT threshold then it's 18% on gains. The amount over the HRT threshold is levied at 28%.

eranou

le_loup wrote: »

Selling share, units, or whatever creates a chargeable event for CGT unless held in an ISA. There is a £10K or so allowance.

If its held in a life assurance bond it would not be subject to CGT but income tax.

OP can you confirm what product/company the funds were held in?

dunstonh

When I last asked about this I was told that gains from this type of fund are subject to income tax (not CGT as I had thought at the time), and that they are already internally taxed at income tax base rate.

What tax wrapper are you holding them in?

Unwrapped would be capital gains tax. Investment bond wrapper would be subject to income tax on surrender but not on fund switches within the investment bond.

fwor

Thanks - that was the vital part that I had missed. These are mainly Investment Bonds, with a small life assurance component.

Presumably it is that part which makes them subject to Income tax and not CGT.

The two examples I have to hand are Aviva/Norwich Union Higher Income Bond and L&G Investment Bond Distribution Fund.

Thinking about it further, maybe it makes sense to keep one or both of these, as I guess it will make it easier to spread gains across both my CGT (in the case of other funds) and income tax allowances if I need a large amount of cash from them in a single tax year at some point in the future.

Your_Hero

fwor wrote: »

Thanks - that was the vital part that I had missed. These are mainly Investment Bonds, with a small life assurance component.

Presumably it is that part which makes them subject to Income tax and not CGT.

The two examples I have to hand are Aviva/Norwich Union Higher Income Bond and L&G Investment Bond Distribution Fund.

Thinking about it further, maybe it makes sense to keep one or both of these, as I guess it will make it easier to spread gains across both my CGT (in the case of other funds) and income tax allowances if I need a large amount of cash from them in a single tax year at some point in the future.

Yes it would be income tax on the investment bonds upon a chargeable event.

If you did need to withdraw a large amount of cash, your investment bonds also have a '5% income withdrawal' feature which is carried over from previous years if unused and there will be no immediate tax liability.

E.g. if it's been 10 years since commencement, you can withdraw 50% of the original investment amount (assuming no withdrawals made prior) with no tax due because this is deemed as a return of capital and not income. This assumes you encash across all segments of the bond as opposed to whole segments.