Chargeable Event Gain

gandalf24

I am thinking of cashing in a  in a Halifax PIP plan and understand i will  receive a Chargeable event gain certificate. Not quite sure what this is.

I am a basic rate taxpayer in Scotland.

Initial investment lump sum of £50k

Nothing else invested, held for 17 years

And gain would be approx £73000 

Do I have to pay tax on this or has this already been paid. If tax has to be paid would I be better off cashing it in to take gains + income to below Scottish tax rate of 21% and do this until PIP is exhausted  ie 25% of plan cashed in over 4 years ,  and if tax has to be paid would it be the difference halifax has paid tax on this plan and me falling into the 21% tax group. Would this apply to all withdrawals.
Also if tax to be paid for  should I wait until the start of the new financial year to inform HMRC.
Would just like some clarity about this if anyone can advice in laymans terms please before i proceed.

Many thanks for any help.

 

Reaper

I believe the PIP is a "non-qualifying life policy". I am only passingly familiar with these so I'd wait for one of the IFAs on this board to comment or go and see an IFA of your choosing.

Having said that my understanding is the chargeable event triggers income tax (not capital gains tax).

In theory if you are basic rate tax payer you would not have to pay anything BUT the surrendered funds will add to your income and is likely to put you into a higher rate, meaning there will be some to pay over and above basic rate.

When you surrender Halifax will give you a certificate saying how much gain has been made.

In principle I think you should be able to surrender only part of it because Halifax splits your investment into lots of policies making such a move possible. However I am rather out of my depth on this topic so please take all the above with a large pinch of salt until it can be confirmed.

lohr500

Reading with interest as I have recently surrendered a bond and received a similar Chargeable Event Gain document.

In round numbers the gain is £26k over 26 years, with tax already paid of £5.2k..

I am currently a lower rate tax payer, but for some of the 26 year period that the gain was made over, I was a higher tax payer.

I've tried Googling for more info on the tax liability but struggled miserably to find anything meaningful.

The document states that ReAssure have also notified HMCR so I am tempted to do nothing at this stage and see what happens next. 

 

Reaper

As there is a lack of anybody knowledgeable posting I will try to respond - but as before please note this is just my understanding and may be wrong...

You will notice £5.2k is 20% of the gain - i.e. basic rate tax

I don't think it matters that you were higher rate in the past, the PIP grows internally free of tax and only becomes liable at surrender. So I think the gain is added to your income for this tax year. If that still leaves you a basic rate tax payer you have nothing more to pay. If it takes you into higher rate then you will have to pay the difference.

But please don't make any financial decisions based on what I say without confirmation!

lohr500

Thanks Reaper. Your take on this is the same as mine, but recognising neither of us are experts! We do have a meeting with our IFA in a few weeks time so I will discuss this with her.

Shedman

On the assumption a PIP is treated the same way as an Investment Bond then there are a number of factors that come into play:

1) The amount added to your income for the year of encashment is the value of one slice - a slice being the total gain divided by the number of complete years investment has been held (so £26k gain over 26 years would only add £1k to current years income).  

2) Gains are treated as Interest income for taxation purposes.  [So using example in 1) above if you were a BR tax payer with total income up to £49,269 none of which was other interest income, then there would be no tax to pay on gain as it would be covered by the £1k personal savings allowance].  

BTW It is irrelevant whether or not you were a HR taxpayer in some of the years the PIP was held, its only the tax status for year of encashment that is relevant.

3) However, even If the value of that one slice moves you into a higher tax band then top-slicing relief (TSR) will come into play.  Quite complicated but in general terms if the value of the one slice moves someone from 20% to 40% tax bands then TSR will usually keep the tax charge on the net chargeable gain to 20% (i.e, £5.2k on £26k gain) 

4) As the PIP is an onshore investment bond then it will be regarded as having already suffered basic rate tax (eg £5.2k on £26k gain).  So a taxpayer who remains in the BR band even after taking account of the additional value of the one slice will not pay any further tax.  And in the example of 3) above the basic rate tax suffered is treated as a credit against the tax charge so again no tax payable on gain.  

Bit of a rough and ready explanation of things based on my limited knowledge dealing with some offshore investment bonds so I may have got some things wrong (or oversimplified) so wise not to treat it as gospel.

A bit of a long read but this document could be useful (although it does go into areas that aren't necessarily relevant to you both) 

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/taxation-uk-investment-bonds

Wildsound

With a gain that big (£73,000) you will need to be careful, as depending on your income for the year, the whole amount (before top slicing relief) plus your gross income is considered when assessing whether your personal allowance will be tapered down to potentially nothing (essentially increasing your effective rate of tax on your income)

There's a chance that it's more tax efficient to cash in half this tax year with the other half next year. However, if you're really concerned about the tax, it may be worth seeking an independent financial adviser to conduct a one off piece of work for you (the tax you end up saving as a result could in part be used to pay their fee)

gandalf24

As my initial post I am thinking of cashing this pip plan in over the next 4 to 5 years gain is now about 80k. as the tax has been paid on this by Halifax am I correct in saying that cashing in over this period of time will not incur me any other tax charges, in laymans terms please 😀  
Thanks in advance, still trying to get my head around what a charge event gain certificate is.

poseidon1

Firstly if your PIP works the same as standard insurance company investment bonds,  then you have 17 years of unused 5%  withdrawal of your intial investment you can take without triggering a 'chargeable event' ie 17 x £2,500 = £42,500. You should get Halifax to confirm this.

Secondly and to back up Wildsound's comment re the operation of top slicing relief to mitigate future tax exposure see below a link to HMRC's internal manual, explaining how availability of the relief has evolved over the years, particularly with regard to personal allowances.

https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm3820

At its most basic, if you were to encash the entire £80k gain you mention in the current year, top slicing would allow you to divide it by 17 years of ownership with the resulting £4705 top sliced figure then added to your other taxable income to see if this would push you into another tax band. If it does not, then simplistically you receive the £80k gain without  further tax liabilities, relieving you of the necessity of having to spread your encashments over the next 4 to 5 years.

However given Scotland's 5 different tax bands, it may well be worth paying a one off fee to a Scottish tax adviser to determine what effect the top sliced amount of £4,705 ( on your current 80k gain) would have if it moved you from the 20% basic rate band  to the 21% intermediate band. That should still give you more than enough headroom until the 42% tax band comes into play, but here in England the 21% band does not exsist.

Question for the adviser is  whether the 21% band is ignored for top slicing purposes and you only worry if the top sliced gain might push you into the 42% band ( which currently it clearly does not).

gandalf24

Hi Poseidon1

Fantastic information precise and crystal clear.
Exactly what I was looking for, many thanks for your help on this matter.  I had been going round in circles on the Internet trying to find this information 
I will go away and crunch the tax numbers 😀

Thanks again Poseidon1

gandalf24

Hi Poseidon 1 

Just found an Halifax online brochure detailing my PIP plan, please see below.

It says the proceeds of my plan are payable free of any personal liability to UK income tax or to capital gains tax

There is no liability to the basic rate of income tax because growth on the underlying investments is taxed

via corporation tax at a rate deemed equivalent to the basic rate of income tax.

Does this mean I will have no tax to pay ? 

Thanks in advance for what might be a stupid question.