Cashing in investments for retirement, tax implications?

sienew

Hi, my mother previously made some investments that she would like to begin cashing in. One or two have risen quite significantly in value. Its now come to the point (especially with rising living costs) that she will quickly need to be cashing some of these in.

The largest for example is a "with profits investment" that has risen from £30k to slightly over £100k within the last 20 years. In this period she has had no other income beyond a standard state pension.  If she cashes this in, what will the tax situation be?

What are the tax implications? Who would be the best person to advice on the best tax strategy, a financial advisor or an accountant?

Dazed_and_C0nfused

I think the starting point needs to be to understand exactly what she has invested in as tax treatment can differ widely.

sienew

Dazed_and_C0nfused said:

I think the starting point needs to be to understand exactly what she has invested in as tax treatment can differ widely.

The largest (and the one she hopes to cash in first) is an "Aviva With profits fund".

Linton

Is the with profits fund held in an "investment bond"?  Is this term or similar used in any of the documentation?  If so, the tax rules are totally different to simply buying a fund.  Investment bonds were often used in the past for this type of investment as they have tax advantages, now better provided by S&S ISAs.

sienew

Linton said:

Is the with profits fund held in an "investment bond"?  Is this term or similar used in any of the documentation?  If so, the tax rules are totally different to simply buying a fund.  Investment bonds were often used in the past for this type of investment as they have tax advantages, now better provided by S&S ISAs.

I have checked and the documents do refer to it as a "flexible bond".

Linton

"flexible bond" would seem to be more a marketing term than a technical one.  However I do think that this is an "investment bond".  Others may have a better idea.  It may be worth checking with Aviva.

Taxation of Investment Bonds is somewhat complex with the gains being potentially taxable under income tax rather than capital gains tax.  However at its simplest AIUI given your mother:
a) has not withdrawn any money since it was bought
b) Her current income is below the tax allowance

then she will not have any tax to pay since basic rate tax is assumed to have been paid by the bond itself and the gains can be spread over the past 20 years.  The spreading of the gains is known by the mysterious term "top slicing".

Hopefully others can confirm my understanding.  

AN IFA would bethe appropriate professional, but hopefully this should not be necessary.

Malthusian

She should speak to a financial adviser. The taxation of investment bonds is complicated and full of traps. If she is a non taxpayer, she is probably paying unnecessary ongoing tax on income and growth within the bond (assuming it is an onshore one). That is not advice to cash the whole lot in (see above re the taxation of investment bonds).

Investment bonds can also be exempt from care fee assessments (as long as you don't deliberately try to exploit this) which may outweigh the tax issue for some. (As long as they are willing to risk Overmydeadbody Grove for the sake of preserving the bond for their heirs.)

With an unspecified amount over £100k invested, it would be worth at least having an initial free conversation with an IFA.

sienew

Linton said:

then she will not have any tax to pay since basic rate tax is assumed to have been paid by the bond itself and the gains can be spread over the past 20 years.  The spreading of the gains is known by the mysterious term "top slicing".

From the research I did that was my rough understanding. Are there any tax forms that she would be required to fill out (and if so, which ones?) or would aviva/HMRC figure this out between themselves when the withdrawal was reported? I did read some websites that said she would have to declare this on her self assessment but as she is just on a basic state pension she obveously doesn't fill in a SA.

Thank you all for the advice so far.

Linton

sienew said:

Linton said:

then she will not have any tax to pay since basic rate tax is assumed to have been paid by the bond itself and the gains can be spread over the past 20 years.  The spreading of the gains is known by the mysterious term "top slicing".

From the research I did that was my rough understanding. Are there any tax forms that she would be required to fill out (and if so, which ones?) or would aviva/HMRC figure this out between themselves when the withdrawal was reported? I did read some websites that said she would have to declare this on her self assessment but as she is just on a basic state pension she obveously doesn't fill in a SA.

Thank you all for the advice so far.

From memory, but it was some time ago,  any information I had to supply was driven by the supplier.  However this was with a Prudential investment bond.  If you ask Aviva I would expect them to be able to explain the full process.  I dont recall any need to fill in an SA.

pip895

Presumably your mother doesn't need the whole amount at once?  If so, might it be possible to draw down the bond in sections - could you enquire of Aviva about that?  Your mum would be less likely to end up with a tax bill that way.  I have rather sketchy memories of my Father doing something of the sort with a policy he had, although his situation was undoubtedly different from your Mums. 

Malthusian

If the gain is more than £10,000 you need to fill out a self assessment form even if no additional tax needs to be paid. See the second comment by "HMRC Admin 17" here.

(I suspect in practice a lot of people get away with not doing an SA when the only reason to do one is that they cashed in an onshore insurance bond on which no tax is due.)

Presumably your mother doesn't need the whole amount at once?  If so, might it be possible to draw down the bond in sections - could you enquire of Aviva about that?

She absolutely must see a financial adviser if she intends to take partial withdrawals. The taxation of insurance bonds is complicated and full of traps. Partial encashments from an insurance bond can result in huge unnecessary tax bills if they are done the wrong way.