Bonds and tax

kelloggs36

Please be kind! My mum is 75 years old and 11 years ago she took out some bonds with Aviva. She invested 45k. They are currently worth just over 61k. She has a state pension plus my dad's work oension totalling an income of around 25k per year. She also has approx 50k in a savings account.

She is loaning my sister 50k for a house deposit and was planning to cash in her bonds to do so but is not sure of the tax implications of doing this. It seems as though doing this would attract a huge tax bill as the amoumt she wihjdraws would be added to her annual income and then taxed...is this right? It seems harsh if so. We understand tax being charged on the growth but the actual investment amount also?

She wants to keep access to money but is happy to do tje loan in a more tax efficient way. Can anybody advise?

Thanks

xylophone

loaning my sister 50k for a house deposit

Is your sister's mortgagee happy with a lent (rather than gifted) deposit.

https://www.aviva.co.uk/existing-customers/investments/select-investment-bond/guaranteed-bond-options/cash-some-all.html

Does the above help at all?

HappyHarry

kelloggs36 wrote: »

Please be kind! My mum is 75 years old and 11 years ago she took out some bonds with Aviva. She invested 45k. They are currently worth just over 61k. She has a state pension plus my dad's work oension totalling an income of around 25k per year. She also has approx 50k in a savings account.

She is loaning my sister 50k for a house deposit and was planning to cash in her bonds to do so but is not sure of the tax implications of doing this. It seems as though doing this would attract a huge tax bill as the amoumt she wihjdraws would be added to her annual income and then taxed...is this right? It seems harsh if so. We understand tax being charged on the growth but the actual investment amount also?

She wants to keep access to money but is happy to do tje loan in a more tax efficient way. Can anybody advise?

Thanks

Check with the provider that this is an onshore bond rather than an offshore bond.

If so, then the bond has paid the equivalent of basic rate tax already. Your mother would only need to pay higher rate tax if the average return over the last years, when added to her current income for the tax year, would make her a higher rate tax payer.

I.e.

1). The gain is £61000 - £45000 = £16000

2). £16000 / 11 years = £1456 per year

3). £25000 + £1456 = £26456

4). £26456 is nowhere near the higher rate tax threshold, so there should be no tax to pay.

If the bond has suffered any withdrawals, then these need to be added to the gain in step 1 above.

If the bond is an offshore bond, then 20% tax is due on the entire gain, and higher rate tax would only need to be paid if the calculation above takes your mother above the higher rate tax threshold.

Your mother will receive a chargeable events certificate when she surrenders the bond, which she would use for her tax return if she does one. However, receiving one does not mean that tax is due, they are sent out as the providers are legally bound to provide one.

Please note xylophone's comment above, most lenders are not happy with loaned deposits.

kelloggs36

It is lent in that upon mum's death, her inheritance must repay that amount.

xylophone

It is lent in that upon mum's death, her inheritance must repay that amount.

Then it is a loan and your sister cannot honestly declare it as a gift when asked about the nature of the deposit?

traineepensioner

kelloggs36 wrote: »

It is lent in that upon mum's death, her inheritance must repay that amount.

Would it be possible for your mum to gift your sister the £50,000 and to alter her will to reflect the "gift"? Your mum would have to survive for 7 years after the gift for it to be excluded from her estate.
....https://www.gov.uk/inheritance-tax/gifts

jamesd

kelloggs36 wrote: »

My mum is 75 years old and 11 years ago she took out some bonds with Aviva. She invested 45k. They are currently worth just over 61k.

Here's a general description of onshore investment bonds. It's necessary to check whether it's onshore or offshore but I'll assume onshore for the rest of this reply.

One key thing to know is that you can take out 5% of what you put in each year for 20 years with no tax on it at the time. If you don't use the full 5% whatever you don't use can be taken out later. After 11 years if she's taken out nothing she can take out 55% of 45k = 24.75k with no tax bill. So that would be the first thing to consider doing because it's easy and tax free.

If she wants more, she could cash in the bond. It might have lots of individual units that would let her take only some.

At the moment it appears that she has a gain of 16k. Using top slicing the taxable gain for income tax calculation would be 16k / 11 years = 1.45k. Assuming she's taken nothing out so far. As long as 1.45k added to her taxable income this year doesn't take her into higher rate income tax there'd be no more tax to pay.

Assuming it's an onshore bond it appears that she can take it all with no tax to pay.

londoninvestor

kelloggs36 wrote: »

It is lent in that upon mum's death, her inheritance must repay that amount.

Forgive me asking the hypothetical: if your mum's estate were below £50k, would your sister have to pay the estate back?

If not, then I wouldn't think this is a loan. Both in legal form and economic reality, it would be a gift that has been brought forward in time.

kelloggs36

Her estate is estimates to be aroind 450k which includes the house. She is to write in the will that the house is to be sold and my sister and I are to onherit half the valje each but my sister has to repay 50k which goes towards the grandchildren's share .

She took out out 3.5k about 4 years ago but nothimg since.

If she cashes it in does the topslicing thing happen automatically? I find it all very confusing.

HappyHarry

If she cashes it in does the topslicing thing happen automatically? I find it all very confusing.

The bond provider will pay the entire proceeds to your mother and won't deduct any tax. Your mother will need to tell HMRC if she has to pay tax, and then pay it. (Note - the bond provider will tell HMRC that the bond is being surrendered).

If you work through the steps in the above post (#3) then you can work out if she needs to pay any tax or not.

Wildsound

kelloggs36 wrote: »

Her estate is estimates to be aroind 450k which includes the house. She is to write in the will that the house is to be sold and my sister and I are to onherit half the valje each but my sister has to repay 50k which goes towards the grandchildren's share .

I imagine it would be written in the form of her receiving £50k less than she was expecting from the estate, not her actually paying £50k back into it as this cannot happen.