Collective Investment Bond

MetManMark

Hi there

We have held a Quilter (previously Old Mutual) Collective Investment Bond for the last 6 years. This was recommended to us by our financial adviser as we had maxed out our ISA allowance and have reasonably healthy pensions.

They were sold to us as a tax efficient way to hold additional savings. I think this describes the product:
https://www.quilter.com/siteassets/documents/platform/kfd/18193_cib_kfd.pdf

I am 47 and aspire to retire at 61 so I am starting to think about the most I need to do to maximise my portfolio and minimise the tax I need to pay. I understand the situation with my ISA's and I *think* I understand the situation with my SIPP and defined benefit pensions. But I am not totally clear about this bond. Over the last 6 years it has increased from £30k to £42k so I am reasonably happy with its performance. But what I am not clear about is how I should be treating this alongside my other investments and what the tax implications are. I *think* I need to tax money out slowly such that I don't exceed the Capital Gains limit £6k this FY; £3k next FY).

I think I am right in saying that I have £12k Capital Gains (at present) so I should aim to take out something like 1/6 of the holding each year for the next 6 years. Is this correct? There is also something in the documentation saying that you can take out 5% each year without worrying about Capital Gains and that any unused withdrawal can be rolled over to the following FY. 

If so I am tempted to set up a monthly payment of ~£300 into my SIPP. 

Does this make sense? I plan to discuss this with our financial adviser next time we speak (typically April) but thought I'd get some views here first.

Thanks in advance
M

dunstonh

 But what I am not clear about is how I should be treating this alongside my other investments and what the tax implications are.

Its a strange recommendation for 2017.   It suffers worse taxation than unwrapped unless you are a higher rate taxpayer who intends to move to basic rate in the future.

You would also have expected to bed & ISA each year from that, unless you are not paying the adviser ongoing.  Or you use your ISA allowance with alternative funds.

 I *think* I need to tax money out slowly such that I don't exceed the Capital Gains limit £6k this FY; £3k next FY).

Its not subject to CGT.  It falls under income tax.

I think I am right in saying that I have £12k Capital Gains (at present) so I should aim to take out something like 1/6 of the holding each year for the next 6 years. Is this correct? 

CGT allowance is £6k this year.  However, as said, CGT doesnt apply.

Does this make sense? I plan to discuss this with our financial adviser next time we speak (typically April) but thought I'd get some views here first.

I would be querying why they felt an onshore single premium whole of life assurance wrapper was better than unwrapped GIA.  

MetManMark

dunstonh said:

 But what I am not clear about is how I should be treating this alongside my other investments and what the tax implications are.

Its a strange recommendation for 2017.   It suffers worse taxation than unwrapped unless you are a higher rate taxpayer who intends to move to basic rate in the future.

You would also have expected to bed & ISA each year from that, unless you are not paying the adviser ongoing.  Or you use your ISA allowance with alternative funds.

 I *think* I need to tax money out slowly such that I don't exceed the Capital Gains limit £6k this FY; £3k next FY).

Its not subject to CGT.  It falls under income tax.

I think I am right in saying that I have £12k Capital Gains (at present) so I should aim to take out something like 1/6 of the holding each year for the next 6 years. Is this correct? 

CGT allowance is £6k this year.  However, as said, CGT doesnt apply.

Does this make sense? I plan to discuss this with our financial adviser next time we speak (typically April) but thought I'd get some views here first.

I would be querying why they felt an onshore single premium whole of life assurance wrapper was better than unwrapped GIA.  

OK - thanks @dunstonh. So how does this work then if you say that it is categorised as income tax? My salary is over £50k but I pay sufficient into SIPP such that I don't pay the higher rate of tax. Presumably I pay tax on the profit that I have made? How would that work in practise if I were to drip feed a small amount into a SIPP?

M

poseidon1

I would direct you to page of 11 of the kfd document link you provided, which tries to explain your income tax exposure on any encashment gains during your period of ownership. The explanation is not brilliant, and it would seem when you sold the bond, the salesman did not make a great job of highlighting the key tax points you should be aware of.

However, this might help:
* The gains and income within the bond are taxed at insurance company corporate rates, so that you the investor are deemed to have paid 20% income tax at source on any gains accruing ( ie you get a 20% tax credit on any taxable gain on an eventual 'chargeable' encashment)

* If you elect to withdraw 5% of your original invested amount ( for the first 20 years ), there is no tax liability thereon , after all you are only taking back a % of what you orignally invested, leaving behind your gains ie these are 'non chargeable' encashments. So for example if you were to now withdraw  £9,000 ( 6 times 5% of £30,000), there would no tax to pay thereon. Thereafter, you have  5% annual withdrawals at £1,500 each for the subsequent 14 years, again with no tax to pay.

* Things get tricky when you wish to access your cumulative investment bond  'income gains' either during the 1st 20 years of its life or in the 21st or subsequent years.  As advised by dunstonh your CGT exemptions are entirely irrelevant to the profit you make from this product. 

 In the year you take a withdrawal that exceeds your cumulative 5% limit, Quilters will  issue you with  a ' chargeable event certificate'  indicating the proportion of your bond profit attached to the withdrawal. However, whether you will pay income tax on this profit, will depend upon whether the  profit pushes you into higher rate tax.
 Even this is not straight forward, since HMRC allows  you to ' top slice' the income gain before adding the income profit to your other sources of taxable income. This 'top slicing relief' is ascertained by dividing the chargeable bond profit, by the number of years  the bond has been in exsistence.  Only if this 'top sliced' gain pushes you into higher rate tax, will the reported gain  attract a tax liability ( after allowing for the aforementioned 20% tax credit).

As you will see a complicated product, but it can be manipulated to your advantage, per below. 

I would suggest you approach Quilters to provide you with a  'what if'  scenario for a potential withdrawal of say £15k and how much chargeable gain this would produce on the relevant event certificate. They should also provide you with an illustration of what the 'top sliced relief' would be on such gain, since this would present you with an opportunity to bump up your sipp contributions to prevent the top sliced gain from pushing you into higher rate tax.

Finally I agree you probably should not have been sold this product, in preference to straight forward unit trusts ( where your cgt exemptions would have been in point), however I note you were likely sold this by an  Old Mutual salesman and as an insurance company of S African origins, the higher level of  salesmen  commissions on this insurance based product of the company, may have been a factor. 

MetManMark

Thanks @poseidon1 for such a comprehensive summary. What you have explained there does align with my understanding of the situation. I have to say that this is a more complex product than I first understood. It was sold to us (both my wife and I have one as do our children) as being a tax efficient way to save - as long as you manage the withdrawals carefully. Part of the attraction being that we could move our investments from one fund to another (not something that we have actually done). We are essentially treating this as a holding account to move money into SIPP / ISA in due course.

There is a chance that we might need to dip into some of these savings for some house improvements next year in which case we will only take out up to the 5% / year amount. (Note that I think that this includes fees so we will need to be careful.) 

Depending on what happens with this I think I am inclined to take chunks out of this investment every few years and transfer it into my SIPP. From what you have said I won't need to declare this on a self assessment tax form if I remain as a lower tax rate payer. I will need to look into "top slicing" to understand that better.

Appreciate your help.
M