Cashing out/closing "with profits bond"

Pagala

Hi

An elderly family member told me today that they have something called a "with profits bond" which they want to cash out or close, with a view to making a major purchase. I had to look up what it was. The situation is, the "with profits bond" was opened a very long time ago, and hasn't been touched. Nothing was withdrawn. Now, they are concerned about tax implications. They say that they would be up for a 40% tax bill if they close it. I haven't corroborated this but I think it's probably correct that closing it would incur an exit penalty in the form of a significant tax liability.

I was a bit concerned to hear this, as, looking into it, these are absolutely terrible investments. As the same person now tells me they're trying to find out ways around the tax themselves, I told them I'm out of my depth so I recommend going to see an accountant. They then told me, insistently, that they couldn't do that because the accountant would charge them £5000-£10000.

I baulked, but anyway, you get the picture. I reckon they were ripped off in being sold a bad investment in the form of a "with profits bond", and they will get ripped off by accountants and all the rest. It's kind of their fault for picking such a rotten and complicated investment. I Googled it and it's all way too complicated for me. 

So do they have any hope of managing this closure in a tax-efficient way, at all? 

Thanks in advance

Dazed_and_C0nfused

Pagala said:

Hi

An elderly family member told me today that they have something called a "with profits bond" which they want to cash out or close, with a view to making a major purchase. I had to look up what it was. The situation is, the "with profits bond" was opened a very long time ago, and hasn't been touched. Nothing was withdrawn. Now, they are concerned about tax implications. They say that they would be up for a 40% tax bill if they close it. I haven't corroborated this but I think it's probably correct that closing it would incur an exit penalty in the form of a significant tax liability.

I was a bit concerned to hear this, as, looking into it, these are absolutely terrible investments. As the same person now tells me they're trying to find out ways around the tax themselves, I told them I'm out of my depth so I recommend going to see an accountant. They then told me, insistently, that they couldn't do that because the accountant would charge them £5000-£10000.

I baulked, but anyway, you get the picture. I reckon they were ripped off in being sold a bad investment in the form of a "with profits bond", and they will get ripped off by accountants and all the rest. It's kind of their fault for picking such a rotten and complicated investment. I Googled it and it's all way too complicated for me. 

So do they have any hope of managing this closure in a tax-efficient way, at all? 

Thanks in advance

What would you estimate their annual income is (excluding the bond)?

Have they got any idea of what the Chargeable Event Gain will be if they go ahead with this plan?

dunstonh

I was a bit concerned to hear this, as, looking into it, these are absolutely terrible investments.

Who says they are absolutely terrible investments?
I have several clients with some old WP funds which are little gems.  

told them I'm out of my depth so I recommend going to see an accountant. They then told me, insistently, that they couldn't do that because the accountant would charge them £5000-£10000.

Its more IFA territory than an accoutant but your family member is way out on cost.   It would be in the hundreds.

 I reckon they were ripped off in being sold a bad investment in the form of a "with profits bond"

As you say, you are out of your depth.  So, you are not really in a position to suggest that.

So do they have any hope of managing this closure in a tax-efficient way, at all? 

Probably.   There usually is.

fwor

Pagala said:

I had to look up what it was.

Before you go any further, have you looked at the documentation that came with the product when they originally invested (or a copy from the provider if they can't find the documents)?

The reason I ask is that I have had similar-sounding investments in the past, and the documentation provided always had a good description of the way in which taxation works, and what options you have to partially cash them in.

You may find that, as we are getting relatively near to the financial year end, they can cash out in two stages on either side of year end to reduce the tax impact.

Albermarle

WP investments are not that exciting and a bit old fashioned with highish charges, but there are a lot of worse things to have invested in.

The family member needs to see a local IFA to make sure they do not get in a tangle with the tax aspect.

Linton

As your relative has not withdrawn any money before tax is relatvely straight forward for investment bonds:

Assuming your relative is not currently close to being a higher rate tax payer and the bond is  > 20 years old and worth less than say  > £100K then there should be no tax to pay. In more detail:


1)The initial cost is taken tax free.  Basic rate income tax is assumed to have been paid by the fund manager. you are liable for the higher rate component of the the total gain in that year.  So there are 2 possibilities:

1) Even with the gain from the bond the relative is still within the basic rate band then there is no  tax to pay on the withdrawal.

2) If the bond gain when added to the normal income takes the relative into the higher rate tax band higher then from what has been said so far the 20% higher rate tax component would be due..

3) Since the withdrawal caused the relative to move to a higher rate trax band the oddly named "Top Slicing Relief" comes into effect:  The total gain is divided by 20 and added to her normal income.  If the result is now below the higher rate tax band then there is no further tax to pay.

Note that if any the relative's situation is any different to what I have assuemd then the tax can get more complicated!

I believe that these old bonds can have been very good investments, particularly for risk averse, inexperienced investors.  I would argue rather better than somethng like a low % equity VLS fund which may be used now..