Investment bond - tax question

retroman62

I am aware of the tax implications in relation to investment bonds including withdrawal across all segments and encashing segments, and the possible tax treatment where there is a chargeable gain in a higher tax threshold, but what if there is a chargeable gain which makes the difference between a personal tax free allowance and the basic rate threshold, bearing mind 20% tax at source has already been applied. A simple example is perhaps easiest:
Suppose in the tax year, I earn £12500 nett from rental income, and no other earnings. This equals my personal tax free allowance. Suppose then I decide to encash some segments resulting in a chargeable gain of another £12500. Which income comes first? Is the rental income applied first, within the allowance, and as 20% tax has already been paid on the chargeable gain, no tax is due? Or is all the income lumped together ie £25000, and therefore tax paid on the excess of £12500? Grateful for clarification please.

Shedman

My understanding (admittedly based on offshore investment bonds not onshore ones) is a gain on encashment of an investment bond is treated as Interest for tax purposes so in your example you would have the £5,000 nil rate starting band for savings plus the £1,000 Personal Savings Allowance so that there would only be £6,500 taxable at 20% but as an onshore bond the 20% has already been paid so should be no tax to pay.

I believe you can arrange the order of taxable items to produce the best tax outcome for you in cases where there things like interest, dividends, other income etc involved.  

Malthusian

Bond gains sit on top of rental income. So your rental income will still be tax free.

In general insurance bonds are not the most tax-efficient way to invest due to the tax on income and gains within the bond, so it might be worth looking at whether it makes sense to hold the bond in the first place.

I believe you can arrange the order of taxable items to produce the best tax outcome for you in cases where there things like interest, dividends, other income etc involved. 

My understanding is that the order of taxable items is always the same in the sense that it's non-savings/non-dividend income first, then savings income on top, then dividends on top of that. However, you can allocate your allowances and reliefs in the way that is most favourable to you.

AccountingWEB has a good example of why this might, somewhat counterintuitively, be a good idea in certain situations. (Note that it is from 2017 so uses old allowances.)