Capital Gains Tax on Bonds?

drunknmunky

Hi,

My mum has the following investments:

Friends Life AXA Distribution Bond
Clerical Medical With Profits Bond
Phoenix Life Ltd Scottish Mutual with Profits Investment Bond

Am I right in thinking that if we sell/cash in/surrender these funds, they won't be liable for CGT, but would be for Income Tax?

Also, this gain could be 'top sliced' (the gain divided by the number of years the bonds were held for), so in reality, as long as the top sliced gain doesn't push my mum into the higher tax bracket, there should be no further Income Tax liable to pay?

Thanks.

robber2

What leads you to believe these would be exempt from CGT.

How much profit in total has been made on these investments?

Rob

drunknmunky

Hi Rob,

The following to discussions led me to believe only Income Tax & not CGT would be liable:

http://www.moneywise.co.uk/investing/tax-efficient-investing/will-we-pay-tax-if-we-cash-investment-bond

https://forums.moneysavingexpert.com/discussion/802745

We stand to make a £35000 gain combined on the top 2 funds listed above that we're considering selling. Both have been held for 20 years.

HappyHarry

These bonds would be liable for income tax rather than CGT.

Also, this gain could be 'top sliced' (the gain divided by the number of years the bonds were held for), so in reality, as long as the top sliced gain doesn't push my mum into the higher tax bracket, there should be no further Income Tax liable to pay?

Thanks.

Yes - providing they are onshore bonds and not offshore bonds. I would not expect them to be offshore, but best to double check before surrendering.

Malthusian

Remember that top slicing relief only applies to the higher rate tax calculation. If, for example, the total gain plus your mum's other income pushed her over the £100,000 threshold, there would be a tax liability due to the loss of the personal allowance. You can't divide the gain by the number of years in this case.

Same applies to other thresholds, such as married couples allowance, child benefit withdrawal, etc, on the off-chance that any of these affect your mother.

Why are they being encashed, out of interest?

drunknmunky

Thanks for all the replies.

The only other income my mum has is her pension which equates to around £11k a year, so top slicing should still be applicable.

They are being encashed purely because they don't appear to have performed well over the past 20 years.

Friends Life AXA Distribution Bond is now worth only 28% more than the purchasing value 20 years ago.

Clerical Medical With Profits Bond is now worth only 45% more than the purchasing value 20 years ago.

All mums other investments that have been held for a minimum of 15 years are currently worth 100% more than their purchasing values.

I'm not from a financial background so this might be a crude way of looking at it. Would you agree with encashing them & reinvesting the cash elsewhere considering their performance for the past 20 years?

HappyHarry

Those figures don't quite add up.

The Friends Life Distribution Bond should have more than doubled in value over the last 20 years.

Has your mother taken any withdrawals from this product? Maybe a regular income?

dunstonh

They are being encashed purely because they don't appear to have performed well over the past 20 years.

Against what benchmark?
Most Bonds have multiple funds available and you can switch the funds to suit needs/risk profile/objectives

Is she drawing an income from the bonds?
Has she made withdrawals?
The figures you have given, especially for one of them do not reflect the performance suggesting that money has been withdrawn.

All mums other investments that have been held for a minimum of 15 years are currently worth 100% more than their purchasing values.

Doubling in that period would be about right unless an income is being drawn.

Would you agree with encashing them & reinvesting the cash elsewhere considering their performance for the past 20 years?

No. Not enough to go on at this stage. It could be a bad thing to do.

Your mum is only on 11k a year. So, there is the possibility of pension credits. Investment bonds are exempt from the means test (on most benefits). So, does she receive any benefits, including pension credits?

Investment bonds do not make or lose money. The investments within the bond do that. So, if you think the investments are not good enough, then why not change the investments rather than the product?

It could be that it is right to get rid of them but it may also be the wrong thing to do.

Malthusian

drunknmunky wrote: »

I'm not from a financial background so this might be a crude way of looking at it. Would you agree with encashing them & reinvesting the cash elsewhere considering their performance for the past 20 years?

Not based on the figures you've given us. If you want to reinvest them to improve future performance then the first step is to calculate the historical performance correctly.

Based on the figures you have given us, the AXA Distribution bond has almost certainly had withdrawals taken from it. Maybe the other ones as well. She may have taken fixed withdrawals (very common with insurance bonds) or she may have taken the natural dividend income from the Distribution Fund (not uncommon for bonds invested in Distribution Funds).

You need to find out how much she has withdrawn from each bond in total over the years because it will affect whether there is any tax to pay. And because you can't correctly calculate historical performance without it.

What were you planning to reinvest the proceeds in?

macca1974

Don't forget also that from a tax point of view if your mother has been taking an "income" from the bonds, it will probably have been done as a 5% tax deferred withdrawal. When she sells the bonds, from memory, I think that the calculation is something like...

Gain = Current value + previous withdrawals - investment amount - previous excesses

So if she has been taking a regular withdrawal, you would need to add that back into the calculation before doing the top slicing. With 20 years investment and only £11K income you probably still won't have any tax to pay, but well worth doing the calculations first!

Malthusian

macca1974 wrote: »

So if she has been taking a regular withdrawal, you would need to add that back into the calculation before doing the top slicing. With 20 years investment and only £11K income you probably still won't have any tax to pay, but well worth doing the calculations first!

I'm going to repeat the point that top-slicing relief doesn't apply to calculating the loss of the personal allowance over £100,000, or any tax calculations other than higher rate liability.

We haven't been given any figures whatsoever, but as we're talking about someone with three investment bonds who has been taking withdrawals over 20 years, I can easily see the total gain exceeding £90,000.