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Chargeable Gains / Top Slicing Help

Hello

I'm hoping some knowledgeable people here can help me!

My husband's grandparents invested for him when he was a teen, this was passed over a couple of years ago but with no knowledge of how they work. I have spent hours trying to understand this and working out calculations but i don't fully understand.

Info

Investment #1 - the one we want to close and withdraw the funds from
Prudential No Initial Charge Bond
Initial investment £10,000
Year invested 2002
Chargeable Gain £16384.23
Total value £26384.23
No withdrawals ever made
'Slice per year' £964
I believe Prudential cover basic tax?

Investment #2
St James' Wealth
Current value c£30k
No intention to close this during this tax year

Husbands Income
Expected to earn £60k (taxable income) this financial year
Has not used PSA of £500
Has been a higher rate tax payer for 3 years

Help Required

We ideally would like to close the Prudential Bond but I can't work out what the tax liability would be? Is it £964 - PSA £500 = £464 x 20% (as prudential cover 20%)= £185.60 x 17 years = £1577.60?

I also have some further questions:

*My husband wasn't a higher rate tax payer for the 17 years, but i assume you pay tax based on your current situation, and it wouldn't be a case of 14 years at no additional tax payable, and 3 years at higher rate?

*The prudential advised HMRC apply the top slicing, so how does this actually work in practice?

*We don't intend to close the St Jame's place investment this tax year but would this affect our ability to close it next year, or have some impact? e.g. could that still be top sliced, and theoretically PSA reapplied if it hadn't been used next year?

*Is there any better way to get the money out, other than the above?

I would be very grateful to anyone who can help.

Thank you
«1

Comments

  • SonOf
    SonOf Posts: 2,631 Forumite
    1,000 Posts Fourth Anniversary
    Investment #1 - the one we want to close and withdraw the funds from
    Prudential No Initial Charge Bond
    Initial investment £10,000
    Year invested 2002
    Chargeable Gain £16384.23
    Total value £26384.23
    No withdrawals ever made
    'Slice per year' £964

    The Pru bonds from this period are cracking products. Cheap and reliable. Interesting that you are looking to surrender this one and not the SJP version which is nowhere near as good.
    *My husband wasn't a higher rate tax payer for the 17 years, but i assume you pay tax based on your current situation, and it wouldn't be a case of 14 years at no additional tax payable, and 3 years at higher rate?

    Forget historic. Tax is based on the year of the chargeable gain.
    *The prudential advised HMRC apply the top slicing, so how does this actually work in practice?

    The insurers notify HMRC of the chargeable gain and individuals need to report it to HMRC if a) they get a tax return or b) further tax is required to be paid. If no further tax is required and no tax return is received then no action needs to be taken.

    HMRC carry out all sorts of calculations when your complete tax returns. A tax return is just a lot of figures that go into various calculators to give an outcome.
    *We don't intend to close the St Jame's place investment this tax year but would this affect our ability to close it next year, or have some impact? e.g. could that still be top sliced, and theoretically PSA reapplied if it hadn't been used next year?

    Again, it's per tax year for the tax assessment and policy year for the number of years.
    *Is there any better way to get the money out, other than the above?

    Is the money actually needed?
    Can he assign it to you if you are a basic rate taxpayer or lower?
  • Thanks for your response, to be honest the reason we are looking at this one is because we don't get any information about it annually, so we have no idea what it's invested in / how it works. I like to understand things in detail, that plus the fact it only grew by 2.5% last year made it the contender. Are you able to summarise how it works, or point me somewhere to find this out?

    My husband doesn't ordinarily do a tax return, how do you report that tax needs to be paid?

    I'm also a higher rate tax payer, we don't need to withdraw it, rather we'd like to and pay it off our mortgage. When the mortgage is repaid we will start investments. I appreciate this is not everyone's preferred approach but we want financial security, and intend to leave the other investment (or maybe this one now) for the long term.

    I appreciate you taking the time to respond
  • Sorry just to be clear, we get an annual statement but it doesn't provide any detail such as a breakdown of where the money is invested
  • SonOf
    SonOf Posts: 2,631 Forumite
    1,000 Posts Fourth Anniversary
    Thanks for your response, to be honest the reason we are looking at this one is because we don't get any information about it annually, so we have no idea what it's invested in / how it works.

    Pru issue annual statements currently on the investment bonds of that period. If you are not getting the statement then contact them as they will be issuing them.
    I like to understand things in detail, that plus the fact it only grew by 2.5% last year made it the contender.

    What is wrong with 2.5% in 2018? 2018 was a negative year. So getting growth in a negative year is a good thing.
    My husband doesn't ordinarily do a tax return, how do you report that tax needs to be paid?

    If he goes ahead, he is a higher rate taxpayer so there will be a tax bill. So, he will need to send HMRC a copy of the chargeable gain and tell them his NI number and PAYE code and they will sort the tax bill out.
    r, we don't need to withdraw it, rather we'd like to and pay it off our mortgage.

    That would not be a good idea. The Pru With Profits fund of that era are steady eddies with around 5-6% p.a being the typical return.

    Surrendering it and paying an additional 20% tax on the gain to repay against a mortgage that is almost certainly costing you a lot less than 5-6% a year seems a waste of money.

    It may be viable to surrender it and pay the money into a pension so that the tax relief offsets the chargeable gain (plus a bit more).

    The SJP bond will be expensive and SJP funds, in general, have pretty poor quality investment returns.

    edit as missed the followup:
    orry just to be clear, we get an annual statement but it doesn't provide any detail such as a breakdown of where the money is invested

    It is an old fashioned product but these are little gems. Not everything old is bad. It wont have the modern data supply that unit linked funds have. However, effectively the Pru WP fund is a multi-asset fund. It invests in a spread of assets globally and in the UK along with fixed interest securities and property. Pru had two versions in 2002. One being cautious and the other being more medium risk.

    I will just add the caveat that I am making the assumption that is a Pru with profits fund you have and not their rare unit linked version. The WP fund dominated distribution but some people did managed to find themselves on the lesser quality Unit linked plan. Tell us the fund name as that will verify if it is the WP gem or the UL version. Also, by naming the fund, someone here will be able to point you to a link with details of the fund.
  • I didn't know it was a negative year - very new to this so trying to learn as I go.

    We wouldn't want to pay it into a pension so it sounds like it is better off where it is for now. The fund name is Optimum Return WP. In the fund section of the statement it says the current value is £16310.07 (statement figures, called up for yesterdays which is why they don't match) when it is worth £26310.07 on the statement. Why is there a £10,000 amount discrepancy, is the original investment held elsewhere?

    I'm now curious about your thoughts on the SJP investment, its value as at 31/12/18 was £29,081 and it is invested in the International Investment Bond. Original value £10k invested in 2000?
  • Albermarle
    Albermarle Posts: 28,850 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    I didn't know it was a negative year - very new to this so trying to learn as I go.
    Products that re linked to financial markets go up and down with the markets , which went down significantly later last year but have since recovered . You should maybe keep an eye out for financial news a bit more.
    The Pru fund is a 'With Profits ' fund . In simple terms it is designed to smooth out the volatility of the markets and produce a steady return over the years . As you said it grew 2.5% last year when many investments had a negative return.

    Regarding the SJP fund it is difficult to make a sensible comment without knowing more about it.
    Some funds are designed as potential high growth /high risk and some for more modest growth/less risk.
    When markets are good, the former one will look good and when markets are poor the latter one will perform better .
  • Keeping up with the financial news and generally building my knowledge in this area is an area I am currently focusing on, until recently i've never had the need :) If you've got any recommendations on how to do this let me know! I feel a vast amount of knowledge is required so it's hard to know where to start, for the first part of this year i've been focusing on building my pension knowledge.
  • bigadaj
    bigadaj Posts: 11,531 Forumite
    Ninth Anniversary 10,000 Posts Name Dropper
    Keeping up with the financial news and generally building my knowledge in this area is an area I am currently focusing on, until recently i've never had the need :) If you've got any recommendations on how to do this let me know! I feel a vast amount of knowledge is required so it's hard to know where to start, for the first part of this year i've been focusing on building my pension knowledge.

    The monevator website is a good start, though quite passively biased.

    If you are higher rate taxpayers then pension payments should be high up your priority list, certainly ahead of paying down presumably low interest mortgage debt.

    SJP have a poor reputation, as much for their very high charges as any issues with performance, however once you are invested with them it can be as xpensive to get out as to carry on.
  • SonOf
    SonOf Posts: 2,631 Forumite
    1,000 Posts Fourth Anniversary
    The fund name is Optimum Return WP.

    I was hoping you would say that. That really is a good fund. It does come in two bits though. The unit value and a final bonus value. You must add the final bonus to the unit value to get the "current" value. That is why you are seeing the two bits.
    I'm now curious about your thoughts on the SJP investment, its value as at 31/12/18 was £29,081 and it is invested in the International Investment Bond. Original value £10k invested in 2000?

    The SJP fund would have gone down a lot more than Pru last year. Its a high risk fund. If you had a typical 1-10 scale for risk, then that SJP fund is 9 and the Pru fund about 5 (possibly 4)

    The Pru product will be cheaper than SJP.

    Over the long term SJP would be expected to make more but it will zig zag heavily in value. you could potentially lose 50% of the value in a 12 month period. High growth potential comes with high loss potential. You say it was invested around 2000. In which case, it has gone through two periods when markets fell around 40% each time.

    The problem you have is that surrender will create an additional 20% tax on the gains whilst you are higher rate taxpayers. That is a lot to lose. It certainly would not be good value for money to do that and reduce the mortgage. It is likely that leaving them where they are until you are a basic rate taxpayer or surrender and make a pension contribution are the best options financially.
  • Albermarle
    Albermarle Posts: 28,850 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    If you've got any recommendations on how to do this let me know!
    These books are often recommended.
    John Edwards: A simple guide to SIPPS and retirement planning + DIY simple investing

    Also you can read the Money sections of the newspapers ( on line or real ones)
    Also Money Observer / Moneywise /This is Money - Not totally independent but still some good articles .
    You can even just go to the websites of investment platforms , like HL : Fidelity : A J Bell etc and they have lots of useful info for new investors if you ignore the marketing fluff.
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