Tax Liability on bond surrender?

Lungboy

My mum has a "with profits" bond with Aviva. She started it in 1995 with £20k, it's now worth £40k and if I'm reading her paperwork correctly then she's also had approx £10k from it over the years. She rang Aviva today to find out about closing the bond and getting the cash out of it. The person she spoke to said she might be liable for quite a bit of tax and would get someone to look into it and call back tomorrow. Does this sound right? From what little I can find I don't think she should be liable for CGT due to how long ago the bond was started. Is that right? What else might she be liable for?

dunstonh

The person she spoke to said she might be liable for quite a bit of tax and would get someone to look into it and call back tomorrow. Does this sound right?

No. There is the potential for tax but if your mum is a basic rate taxpayer or lower then its unlikely. If she is a higher rate taxpayer then there will be a tax liability on the gain.

Crudely speaking, the gain is £30k (depending on whether she did the £10k withdrawal as a sale of policies/segments or whether she did a partial surrender across all the policies). It wont be 30k as the previous surrender most likely created a chargeable gain. However, I am looking at worse case.

If she is basic rate taxpayer or lower, she can apply top slicing relief for the number of complete years. Lets say 20. So, 30,000 divided by 20 years is £1500. If that £1500 is added to her income in this tax year and does not take her into higher rate tax then there will be no further tax to pay. If it takes her into higher rate then there will be.

If she has any means tested benefits, then the surrender could impact on those. The investment bond is exempt from means testing. By surrendering it, it goes into a bank account and that bank account is not exempt. So things like pension credit etc would likely be reduced.

Lungboy

She's 75 and disabled if that matters? Her only income are her pensions and savings income (not much of the latter). There's no way any amount would take her into the higher rate tax bracket. Thanks for the help.

E: there's no income tax to pay is there?

MDMD

Technically it is a "Chargeable event gain" but as mentioned above if she is BR she should be OK.

Read HS320 on the Gov website though or call HMRC and ask for a technician.

Lungboy

Aviva called back today. The lady that spoke to mum said it was whether the entire gain (~£28k apparently) would put her into the higher tax bracket, nothing about dividing it by the number of years.

jem16

Lungboy wrote: »

Aviva called back today. The lady that spoke to mum said it was whether the entire gain (~£28k apparently) would put her into the higher tax bracket, nothing about dividing it by the number of years.

Then the lady at Aviva is wrong.

Have a read at this - particularly the section on Top Slicing Relief which applies to your Mum.

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

Basically with a gain of £28k over 20 years, the Top Slice is £1400. If you add this to your Mum's other taxable income would it take her into higher rate tax - ie over £42,385?

If the answer to that is No, then there is no tax due.