Capital gain on investment bond

Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years. We took our 5% tax allowance over each year and the policy year resets on October.  We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  

We are both are both basic rate tax payers, so trying to confirm what the payable tax implications would be on the gain? We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year. So does the 5% that we took in November 2023 have any implications on the final gain amount?

thanks in advance


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  • lindabea
    lindabea Posts: 1,472
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    Frim my very limited knowledge of these type of bonds, I don't think you will be liable to pay any tax if you surrender the policy.  Basic rate tax has already been paid by the provider and as long as you cash in the policy while you're a basic rate tax payer, there is no additional tax to pay.

    If my understanding is wrong, I'm sure someone who is more knowledgeable will come along and explain further..   
    Before doing something... do nothing
  • dunstonh
    dunstonh Posts: 115,724
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    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • GDB2222
    GDB2222 Posts: 24,346
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    I think the gain is chargeable to income tax, not CGT.  

    There’s some info here:
    https://www.mandg.com/pru/adviser/en-gb/tools-calculators/bond-gain-tool

    It may be worth getting paid for advice on this.

    No reliance should be placed on the above! Absolutely none, do you hear?
  • lindabea
    lindabea Posts: 1,472
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    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    DUNSTONH - Out of interest, why do you say that the 5% deferred withdrawals need to be added back in? THe 5% withdrawals would have been from the original capital; tax is due on the gain and not dependent on the original money paid in.  Can you please explain.   
    Before doing something... do nothing
  • dunstonh
    dunstonh Posts: 115,724
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    lindabea said:
    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    DUNSTONH - Out of interest, why do you say that the 5% deferred withdrawals need to be added back in? THe 5% withdrawals would have been from the original capital; tax is due on the gain and not dependent on the original money paid in.  Can you please explain.   
    The 5% annual allowance is not tax free.  It is deferred.  

    THere is more explanation here:
    https://techzone.abrdn.com/public/investment/Taxation-of-bonds

       
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • GDB2222
    GDB2222 Posts: 24,346
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    dunstonh said:
    lindabea said:
    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    DUNSTONH - Out of interest, why do you say that the 5% deferred withdrawals need to be added back in? THe 5% withdrawals would have been from the original capital; tax is due on the gain and not dependent on the original money paid in.  Can you please explain.   
    The 5% annual allowance is not tax free.  It is deferred.  

    THere is more explanation here:
    https://techzone.abrdn.com/public/investment/Taxation-of-bonds

       
    Agreed. the withdrawals need to be added back because the 5% withdrawals are withdrawals of the investor's own capital. 

    So, if you imagine drawing 5% a year for 20 years (20 times 5% =100%) at the end of that time there is none of the original capital still in the bond, and the whole remaining bond value represents taxable gain.



    No reliance should be placed on the above! Absolutely none, do you hear?
  • pernes
    pernes Posts: 270
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    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    Thanks  for your reply the bond is onshore. Reason for surrender is the poor return on the investment 
  • lindabea
    lindabea Posts: 1,472
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    edited 2 February at 7:07PM
    GDB2222 said:
    dunstonh said:
    lindabea said:
    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    DUNSTONH - Out of interest, why do you say that the 5% deferred withdrawals need to be added back in? THe 5% withdrawals would have been from the original capital; tax is due on the gain and not dependent on the original money paid in.  Can you please explain.   
    The 5% annual allowance is not tax free.  It is deferred.  

    THere is more explanation here:
    https://techzone.abrdn.com/public/investment/Taxation-of-bonds

       


    So, if you imagine drawing 5% a year for 20 years (20 times 5% =100%) at the end of that time there is none of the original capital still in the bond, and the whole remaining bond value represents taxable gain.



    Agreed. the withdrawals need to be added back because the 5% withdrawals are withdrawals of the investor's own capital. 

    But you don't pay tax on the original capital, so what is the purpose of adding it back to the chargeable gain? It's not making any sense to me!!

     Thank you Dunstonh and GDB2222 for your explanations, but unfortunately, I still don't see why the original capital needs to be added back to the gain.  Let's take an example..  Say you invested 20K and for each year you withdrawn 5% for 20 years.  Over the 20 years, you would have withdrawn all your original investment.  ie £1000*20 years.  Now let's say you want to cash in the bond.in the 21st year and there is a chargeable gain of £30000.  My understanding is that tax would be payable on the gain only; so why the need to add the 20K worth of withdrawals .  If you did not take any withdrawals, the chargeable gain would still be 30K (although in reality somewhat more as the 20K would have been invested for the full 20 years) I'd be grateful if you can explain further as I also have one of these bonds and I would like to understand the tax implications.
    Before doing something... do nothing
  • GDB2222
    GDB2222 Posts: 24,346
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    lindabea said:
    GDB2222 said:
    dunstonh said:
    lindabea said:
    dunstonh said:
    Hi, we have a join investment bond that we have had for approximately 14 years, which hasn’t faired too well over the last few years.
    2022 was very poor, but 2023 was better for mixed asset investments.

    We want to close the policy and based on the current surrender value of the policy, If it surrendered today there would be a gain of £41,025.00.  
    Does that gain, include all the previous 5% deferred withdrawals from previous years? if not, you have to add them back in?

    What is the reason for surrender?   

    We understand we are able to claim £6000 each under capital gains tax up to the end of this financial year.
    Investment bonds, either onshore of offshore do not suffer capital gains tax.  They work under income tax.
    Is yours onshore or offshore?

    DUNSTONH - Out of interest, why do you say that the 5% deferred withdrawals need to be added back in? THe 5% withdrawals would have been from the original capital; tax is due on the gain and not dependent on the original money paid in.  Can you please explain.   
    The 5% annual allowance is not tax free.  It is deferred.  

    THere is more explanation here:
    https://techzone.abrdn.com/public/investment/Taxation-of-bonds

       


    So, if you imagine drawing 5% a year for 20 years (20 times 5% =100%) at the end of that time there is none of the original capital still in the bond, and the whole remaining bond value represents taxable gain.



    Agreed. the withdrawals need to be added back because the 5% withdrawals are withdrawals of the investor's own capital. 

    But you don't pay tax on the original capital, so what is the purpose of adding it back to the chargeable gain? It's not making any sense to me!!

     Thank you Dunstonh and GDB2222 for your explanations, but unfortunately, I still don't see why the original capital needs to be added back to the gain.  Let's take an example..  Say you invested 20K and for each year you withdrawn 5% for 20 years.  Over the 20 years, you would have withdrawn all your original investment.  ie £1000*20 years.  Now let's say you want to cash in the bond.in the 21st year and there is a chargeable gain of £30000.  My understanding is that tax would be payable on the gain only; so why the need to add the 20K worth of withdrawals .  If you did not take any withdrawals, the chargeable gain would still be 30K (although in reality somewhat more as the 20K would have been invested for the full 20 years) I'd be grateful if you can explain further as I also have one of these bonds and I would like to understand the tax implications.
    "But you don't pay tax on the original capital, so what is the purpose of adding it back to the chargeable gain? It's not making any sense to me!!"

    I think we are getting confused here. So let's do an example:

    Someone says: "My gain is £50k".

    It then turns out that their bond is currently worth £150k, and they paid £100k for it. On the face of it, their chargeable gain is indeed £50k. 

    But, then they let on that they have had £30k back in tax-free withdrawals. 

    So, in fact, their chargeable gain is £80k.

    One way to get to that £80k figure is to say that the capital remaining in the bond is only £70k, and then deduct that from the current bond value.

    The other way is just to add the withdrawals onto the 
    "My gain is £50k".
    No reliance should be placed on the above! Absolutely none, do you hear?
  • lindabea
    lindabea Posts: 1,472
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    edited 2 February at 8:12PM
    Thank you for your reply. I understand your explanation, but the bit I can't get my head round is hat the 30K withdrawal  has been from the capital. So in your example, the 30K is not subject to tax, and the taxable gain remains as 50K.

    To take your example further, suppose there were no deferred withdrawals. You invested 100K and valuation after 20 years is 150K.  In this case, you would subtract the 100K leaving the 50K as gain and there's nothing to add back since no withdrawals made during the period.    So please explain why in your example with the withdrawals, the gain is 80K and with no withdrawals the gain is 50K

    A quick edit to illustrate my reasoning further:  If you withdraw only 5% a year, there should be no chargeable gain.  However, a deferred chargeable gain would only occur if you withdraw more than 5% per year.  Isn't that the way it works, or have I misunderstood it 
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