Tax on investment bond surrender

Upzeecreek

Posted in tax forum,but advised to post here instead.
My mother has an onshore investment bond  ( whole of life ) 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? Her income is currently under the personal allowance.
This is where I'm confused..I have read that 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?
Please correct me if I have incorrectly assumed something! Any advice greatly received before she decides to cash it in.Thanks 

masonic

You might find this useful: https://www.moneyadviceservice.org.uk/en/articles/investment-bonds#tax-on-investment-bonds
Looks to me like your understanding is correct. If she is able to top-slice, then the whole profit would not be added to her income for the tax year of surrender. You need to factor in the withdrawals to the profit figure, but it doesn't look like this will be material to the tax situation.

Bobziz

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

Linton

Bobziz said:

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

No, because it is not over £100K when it is considered for tax as top slicing keeps the effective income below the higher rate band.  I agree with Masonic's response.

HappyHarry

Linton said:

Bobziz said:

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

No, because it is not over £100K when it is considered for tax as top slicing keeps the effective income below the higher rate band.  I agree with Masonic's response.

Sorry - that isn't correct.

The entire gain on surrender is added to the individuals income in the year for the purpose of assessing an individual's personal allowance.

Top slicing is used to calculate any higher rate tax that needs to be paid.

Someone can surrender an investment bond, have no liability to higher rate tax, but still lose their personal allowance, and end up with a subsequent tax liability.

https://www.pruadviser.co.uk/knowledge-literature/oracle-plus/taxation-uk-investment-bonds/

Chargeable event gains (without top slicing) are included in an individual's income when assessing entitlement to personal allowances (see our Personal Allowance article for more information). 

Upzeecreek

HappyHarry said:

Linton said:

Bobziz said:

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

No, because it is not over £100K when it is considered for tax as top slicing keeps the effective income below the higher rate band.  I agree with Masonic's response.

Sorry - that isn't correct.

The entire gain on surrender is added to the individuals income in the year for the purpose of assessing an individual's personal allowance.

Top slicing is used to calculate any higher rate tax that needs to be paid.

Someone can surrender an investment bond, have no liability to higher rate tax, but still lose their personal allowance, and end up with a subsequent tax liability.

https://www.pruadviser.co.uk/knowledge-literature/oracle-plus/taxation-uk-investment-bonds/

Chargeable event gains (without top slicing) are included in an individual's income when assessing entitlement to personal allowances (see our Personal Allowance article for more information). 

Yes, this is what I've been reading and has confused me. 
So do you think she would just lose her personal allowance in the year the bond is surrendered and that's all or would there be more tax to pay in addition to losing personal allowance? So confusing! 

HappyHarry

Upzeecreek said:

HappyHarry said:

Linton said:

Bobziz said:

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

No, because it is not over £100K when it is considered for tax as top slicing keeps the effective income below the higher rate band.  I agree with Masonic's response.

Sorry - that isn't correct.

The entire gain on surrender is added to the individuals income in the year for the purpose of assessing an individual's personal allowance.

Top slicing is used to calculate any higher rate tax that needs to be paid.

Someone can surrender an investment bond, have no liability to higher rate tax, but still lose their personal allowance, and end up with a subsequent tax liability.

https://www.pruadviser.co.uk/knowledge-literature/oracle-plus/taxation-uk-investment-bonds/

Chargeable event gains (without top slicing) are included in an individual's income when assessing entitlement to personal allowances (see our Personal Allowance article for more information). 

Yes, this is what I've been reading and has confused me. 
So do you think she would just lose her personal allowance in the year the bond is surrendered and that's all or would there be more tax to pay in addition to losing personal allowance? So confusing! 

You said earlier that her income is below the current personal allowance. Therefore, with no personal allowance available, the top slicing will still not make her a higher rate taxpayer, so there will be no tax to pay on the gain on the bond.

However, the income she has had, which was below the personal allowance will no longer be below the personal allowance (as it will be £0 for her), and so she will need to pay income tax on those earnings, at basic rate. 

masonic

Upzeecreek said:

HappyHarry said:

Linton said:

Bobziz said:

I wonder whether the fact that it's over £100k means that the personal allowance will be reduced ?

No, because it is not over £100K when it is considered for tax as top slicing keeps the effective income below the higher rate band.  I agree with Masonic's response.

Sorry - that isn't correct.

The entire gain on surrender is added to the individuals income in the year for the purpose of assessing an individual's personal allowance.

Top slicing is used to calculate any higher rate tax that needs to be paid.

Someone can surrender an investment bond, have no liability to higher rate tax, but still lose their personal allowance, and end up with a subsequent tax liability.

https://www.pruadviser.co.uk/knowledge-literature/oracle-plus/taxation-uk-investment-bonds/

Chargeable event gains (without top slicing) are included in an individual's income when assessing entitlement to personal allowances (see our Personal Allowance article for more information). 

Yes, this is what I've been reading and has confused me. 
So do you think she would just lose her personal allowance in the year the bond is surrendered and that's all or would there be more tax to pay in addition to losing personal allowance? So confusing! 

There may be more tax to pay by virtue of her losing her personal allowance. Presumably she will also lose entitlement to a Personal Savings Allowance. What other income does she have?

Upzeecreek

Thanks for all the help so far. 
Her income from pensions and interest on savings is somewhere in region of £8000.

masonic

Upzeecreek said:

Thanks for all the help so far. 
Her income from pensions and interest on savings is somewhere in region of £8000.

So she'd be looking at paying basic rate tax on all of that at a cost of ~£1600.

dunstonh

The recent changes to allow top-slicing relief to not reduce the personal allowance did not, unfortunately, change the reduction in the personal savings allowance.    I had a discussion with my MP and the Treasury over this as I didn't think it was logical to change one without the other but they insisted that keeping the PSA reduction would be the correct action.