Tax on investment bond

Upzeecreek

My mother has an onshore investment bond that will be assigned to her following the recent death of my father. 
He took the bond out in feb 2002 with an initial investment of £107,000. £10,000 was added in June 2007 and £30,000 in Feb 2008.
He withdrew £6000 in may 2005 and £7000 in April 2009.
The surrender value is now £340,000
So our understanding is that the profit is £340,000 minus the investments (107,000+10,000+30,000) = £156,088. 
£156,088 is the divided by 19 ( number of years bond held for top slicing ) which gives a profit of £8215. 
So are we right in thinking that there is no tax to pay if she was to cash in the bond? 
This is where I'm confused...the £156,088 is added to her income for the tax year and what does that mean ?  Will she need to pay anymore tax on the bond? Does it affect her personal allowance? Her income currently is below the personal allowance. 
Please correct me if I have incorrectly assumed something! Any advice greatly received! Thanks

[Deleted User]

If you are claiming top slicing relief it is the £8215 which is ‘added to her income’. That is the whole point of TCR in that the slice is used to determine the appropriate rate of tax, not the ‘profit’ which I have assumed to be correct. So, does the 8615 make her liable to higher rate tax? Not from what you have said and there should be no further tax liability.

 However, you do have to claim TCR. It would be better to await for the chargeable event certificate and then come back to us.

Upzeecreek

purdyoaten2 said:

If you are claiming top slicing relief it is the £8215 which is ‘added to her income’. That is the whole point of TCR in that the slice is used to determine the appropriate rate of tax, not the ‘profit’ which I have assumed to be correct. However, you do have to claim TCR. It would be better to await for the chargeable event certificate and then come back to us.

Thanks for that. We just want to know that we are doing the right thing and know the tax situation   before cashing in the bond..A bit late to ask for advice after it's been cashed in if you see what I mean..

[Deleted User]

Upzeecreek said:

purdyoaten2 said:

If you are claiming top slicing relief it is the £8215 which is ‘added to her income’. That is the whole point of TCR in that the slice is used to determine the appropriate rate of tax, not the ‘profit’ which I have assumed to be correct. However, you do have to claim TCR. It would be better to await for the chargeable event certificate and then come back to us.

Thanks for that. We just want to know that we are doing the right thing and know the tax situation   before cashing in the bond..A bit late to ask for advice after it's been cashed in if you see what I mean..

Sorry - I thought that had happened. Why don’t you telephone the company concerned? 

Obviously I know nothing about the bond but is it being cashed in before maturity? Many of these bonds pay additional bonuses upon maturity. I may be wrong but, if it runs full term, does that eliminate any gain (not withstanding the two small previous withdrawals)?

Upzeecreek

It's a whole of life bond. My father was the bond holder with my mother's life assured. It can continue until her death if necessary. There is no maturity date involved just a surrender valuation which I have stated above as the company provided it for probate.
The company won't give any tax advice. 

[Deleted User]

Upzeecreek said:

It's a whole of life bond. My father was the bond holder with my mother's life assured. It can continue until her death if necessary. There is no maturity date involved just a surrender valuation which I have stated above as the company provided it for probate.
The company won't give any tax advice. 

I see. I hope that I have helped you with the TCR. Perhaps there would be some value in asking further on the tax and investments board?

Sea_Shell

Sorry to jump on your thread Upzeecreek, but I was searching for information on how Investment bonds are taxed and came across it.

I have some additional questions, that may be relevant to your original question, if you're still needing answers as to what to do.

How is the tax treated whilst a Bond is in the Joint names of the original holders (2 lives assured and matures on 2nd death)

I've had a read through how the taxation works (wow it's confusing) and I'm worried that the surviving policy holder has not been paying any tax on withdrawals as they go, and how that then may affect dealing with their estate in the future, assuming the bond hasn't been depleted or cashed in as a lump sum before then.

Could you end up with a tax liability, but no remaining funds to pay that tax liability?    Insolvent estate?

Linton

Sea_Shell said:

Sorry to jump on your thread Upzeecreek, but I was searching for information on how Investment bonds are taxed and came across it.

I have some additional questions, that may be relevant to your original question, if you're still needing answers as to what to do.

How is the tax treated whilst a Bond is in the Joint names of the original holders (2 lives assured and matures on 2nd death)

I've had a read through how the taxation works (wow it's confusing) and I'm worried that the surviving policy holder has not been paying any tax on withdrawals as they go, and how that then may affect dealing with their estate in the future, assuming the bond hasn't been depleted or cashed in as a lump sum before then.

Could you end up with a tax liability, but no remaining funds to pay that tax liability?    Insolvent estate?

You cannot end up with a tax liability but no funds to pay it:

The bond itself pays basic rate tax so it is only higher rate tax which is of concern.  Normal withdrawals must be within the limit of 5% of initial cost per year for 20 years and are not liable to tax at that time.

When the account is closed the gain is calculated as final value+withdrawals-cost and is treated as a lump sum income in the current year.  The maximum that can be withdrawn is simply the initial cost (20X5%).  Therefore you must have at least the whole of the actual gain on which you are taxed left in the account when it is closed.

Sea_Shell

Linton said:

Sea_Shell said:

Sorry to jump on your thread Upzeecreek, but I was searching for information on how Investment bonds are taxed and came across it.

I have some additional questions, that may be relevant to your original question, if you're still needing answers as to what to do.

How is the tax treated whilst a Bond is in the Joint names of the original holders (2 lives assured and matures on 2nd death)

I've had a read through how the taxation works (wow it's confusing) and I'm worried that the surviving policy holder has not been paying any tax on withdrawals as they go, and how that then may affect dealing with their estate in the future, assuming the bond hasn't been depleted or cashed in as a lump sum before then.

Could you end up with a tax liability, but no remaining funds to pay that tax liability?    Insolvent estate?

You cannot end up with a tax liability but no funds to pay it:

The bond itself pays basic rate tax so it is only higher rate tax which is of concern.  Normal withdrawals must be within the limit of 5% of initial cost per year for 20 years and are not liable to tax at that time.

When the account is closed the gain is calculated as final value+withdrawals-cost and is treated as a lump sum income in the current year.  The maximum that can be withdrawn is simply the initial cost (20X5%).  Therefore you must have at least the whole of the actual gain on which you are taxed left in the account when it is closed.

But what if substantially more than the 5%x20 has been withdrawn, but no tax return completed, and the fund is now a fraction of the starting value plus growth?

I'll try and put together some example figures...

Jeremy535897

More details here:
https://www.pru.co.uk/pdf/INVS0002.pdf

If the bondholder is a basic rate taxpayer, and would be if the excess withdrawals are regarded as income, the withdrawals in excess of the 5% limit would not be subject to tax

Linton

Sea_Shell said:

Linton said:

Sea_Shell said:

Sorry to jump on your thread Upzeecreek, but I was searching for information on how Investment bonds are taxed and came across it.

I have some additional questions, that may be relevant to your original question, if you're still needing answers as to what to do.

How is the tax treated whilst a Bond is in the Joint names of the original holders (2 lives assured and matures on 2nd death)

I've had a read through how the taxation works (wow it's confusing) and I'm worried that the surviving policy holder has not been paying any tax on withdrawals as they go, and how that then may affect dealing with their estate in the future, assuming the bond hasn't been depleted or cashed in as a lump sum before then.

Could you end up with a tax liability, but no remaining funds to pay that tax liability?    Insolvent estate?

You cannot end up with a tax liability but no funds to pay it:

The bond itself pays basic rate tax so it is only higher rate tax which is of concern.  Normal withdrawals must be within the limit of 5% of initial cost per year for 20 years and are not liable to tax at that time.

When the account is closed the gain is calculated as final value+withdrawals-cost and is treated as a lump sum income in the current year.  The maximum that can be withdrawn is simply the initial cost (20X5%).  Therefore you must have at least the whole of the actual gain on which you are taxed left in the account when it is closed.

But what if substantially more than the 5%x20 has been withdrawn, but no tax return completed, and the fund is now a fraction of the starting value plus growth?

I'll try and put together some example figures...

A withdrawal greater than the 5% limit is taken as a partial closure of the bond - it's known as a chargeable event..  So the  tax on the gain would be charged at that point.