Capital gain on investment bond

GDB2222

[Deleted User] said:

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

No, in my example, the taxable gain is £80k.

[Deleted User]

GDB2222 said:

[Deleted User] said:

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

No, in my example, the taxable gain is £80k.

Yes I know you're saying the gain is £80, but why. You are also saying that without the 30K withdrawals, the gain would indeed be 50K. So why would the withdrawals become part of the gain when the 30K were part of the original amount invested? 

dunstonh

Reason for surrender is the poor return on the investment 

Most investment bonds offer multiple investment funds.  Some of them are whole of market. 

It isn't the investment bond that has had a poor return.  it is the funds it was invested in.
Also, 2022 was a really bad year for low risk/defensive assets. All of them lost money and some had their worst loss in over 100 years.    That was 2022 though.   2023 should have been positive (albeit due to a good ending to the year).  2024 YTD is positive too.

Taking it out because of a bad year is usually a bad idea, especially if it triggers tax unnecessarily.

 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.

The outcome is the same whether you add the withdrawals back in or you reduce the starting value by the amount of the withdrawals.  It is the difference between the capital invested minus withdrawals and the value 

e.g. 
£100k paid in.     £40k drawn out.   Current value is £120k  = gain of 60k.

Current value + WD - initial investment = gain     /   £120k+£40k-£100k = £60k
Current value - (initial investment - WD) = gain   /   £120k-(100k-40k)=£60k

So, if you do it the way you are thinking it through, those withdrawals are the return of the initial capital.  So, therefore the initial capital has gone down as you have taken a chunk of it back as withdrawals.

Topsinger

My mum gifted me her investment bonds just before she died. She had them for 20 years and withdrew 5% most years. Upon her death they had to be cashed which I suspected would result in a personal tax liability. I sought information from various sources, including viewing this forum but in the end I paid an accountant to do the calculations, which use something known as ‘top slicing’. The fee was money well spent as far as I am concerned.

[Deleted User]

dunstonh said:

Reason for surrender is the poor return on the investment 

Most investment bonds offer multiple investment funds.  Some of them are whole of market. 

It isn't the investment bond that has had a poor return.  it is the funds it was invested in.
Also, 2022 was a really bad year for low risk/defensive assets. All of them lost money and some had their worst loss in over 100 years.    That was 2022 though.   2023 should have been positive (albeit due to a good ending to the year).  2024 YTD is positive too.

Taking it out because of a bad year is usually a bad idea, especially if it triggers tax unnecessarily.

 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.

The outcome is the same whether you add the withdrawals back in or you reduce the starting value by the amount of the withdrawals.  It is the difference between the capital invested minus withdrawals and the value 

e.g. 
£100k paid in.     £40k drawn out.   Current value is £120k  = gain of 60k.

Current value + WD - initial investment = gain     /   £120k+£40k-£100k = £60k
Current value - (initial investment - WD) = gain   /   £120k-(100k-40k)=£60k

So, if you do it the way you are thinking it through, those withdrawals are the return of the initial capital.  So, therefore the initial capital has gone down as you have taken a chunk of it back as withdrawals.

DUNSTONH  Thank you for your explanation.  I can now see what you meant  .  

dunstonh

Topsinger said:

My mum gifted me her investment bonds just before she died. She had them for 20 years and withdrew 5% most years. Upon her death they had to be cashed which I suspected would result in a personal tax liability. I sought information from various sources, including viewing this forum but in the end I paid an accountant to do the calculations, which use something known as ‘top slicing’. The fee was money well spent as far as I am concerned.

The policies can either be surrender or assigned to a new owner.  In some cases, assigning them and then surrendering is better or worse depending on the tax situation of the new owner(s).  And that is plural as you can typically have up to 4 owners and gains would then be spread across all owners.