CGT when surrendering a with profit bond

PTK63

Hi, 
I am really hoping that someone might be able to help me as I am so confused! I am almost 74 and want to do some building work on my property so want to surrender my with profit bond. I opened the bond in March 2000 with £40k after my husband died. The bond and bonus combined leave a £36.7k 'profit'. I receive under £2k state pension annually. When I called the finance company today I was told that after I close the account there might be capital gains tax to pay and if there is I have to send a certificate to the HMRC. I have absolutely no idea if I need to pay tax or not. I have spent all afternoon on the internet and have confused myself with online calculators and information on 'top slicing'!! If anyone has any hints or tips on how to find out more I would be most grateful.

dunstonh

 When I called the finance company today I was told that after I close the account there might be capital gains tax to pay and if there is I have to send a certificate to the HMRC.

Investment bonds are not subject to capital gains tax.  However, full surrender would create a chargeable event which is calculated under income tax.

Is it an onshore investment bond or an offshore investment bond?

Have you made any withdrawals or partial surrenders on it previously?  

PTK63

Hi, thanks for replying. It is an onshore bond and I withdrew £7k from it many years ago. With the current 'profit' and my pension, I am just over £47k in the current year. Do I need to include the £7k withdrawal in the calculation too?

Linton

Investment bond taxation is messy.  I am not an expert but cashed in my investment bond recently....

Assuming this is a smple investment bond as was common 20 years ago you probably wont have to pay any tax.  If there is tax it will be income tax, not capital gains. What happens broadly is that the company effectively pay standard rate income tax on the gains invisibly to you so any tax due only arises from higher rate tax.

When you cash in the lot a calculation is made of your total net gain over the lifetime of the bond.  You would then pay income tax on it as income in the current tax year.  Depending on your other income the result could be that you get pushed into a higher rate tax band and so need to pay extra tax.

However this is seen as being unfair and so "top slicing" is provided.  Under top slicing your gains are spread over the lifetime of the bond which in your case is 20 years.  If the annual allocation keeps you at the standard tax rate then there is no further tax to pay.

dunstonh

 Do I need to include the £7k withdrawal in the calculation too?

This is one of those complications.  Did you take the withdrawal by surrendering individual policy segments or did you take it using the 5% deferral allowance (or a combination).  The former doesn't add them back on. The latter does.

I suspect it will create little difference after top-slicing relief in terms of additional taxation as either way you dont appear to be entering the higher rate band.   But you may find your personal savings allowance is reduced to £500 for this year. (which may or may not be an issue depending on how much interest you receive).

PTK63

Hi, I surrendered some of the units from the policy.

dunstonh

PTK63 said:

Hi, I surrendered some of the units from the policy.

I am going to labour on this point a little to be 100% sure.    When you say you surrendered some of the units do you mean investment fund units or some of the policy segments/policies.  i.e. the investment bond will be made up of a number of policies.  Often 100 but sometimes more.   
When you make a withdrawal, you can either sell some units within the funds equally across all policy segments (this uses the 5% deferral method which requires the withdrawal to be added on when you surrender the policy).   Or you can surrender a set number of policy segments.  i.e. surrender policy segments 95 to 100 leaving you with 1 to 94.     In this scenario, you do not add the withdrawal back on.