Prufund - CGT ?

sjw11

I am helping an 85 year old in our village who wants to tidy up his financial affairs. He seems to want to put all his eggs in one basket (Halifax bank). Yes, I know that one shouldn't put more than £85k in any one company.
I have come across a Prufund investment which I think is a Life policy and probably dates back to the days when "The man from the Pru" came round and took an amount from you each week or month.
It is valued at over £120k now. He had no idea it was worth that much.
If he cashes it in, would it be subject to capital gains tax ? 

dunstonh

If he cashes it in, would it be subject to capital gains tax ? 

Zero.   Life funds are not subject to capital gains tax.  They do however, get treated under income tax.  You would need to know the exact number of policy years, the original value, the value of any withdrawals, if there have been any surrenders(if so, what) and his current income.

sjw11

ok, so no CGT, but he has had this for years and years, and probably made over £100k.
He has both state and private pension which (obviously these days) puts him into paying standard rate tax on some of that.
If he cashed it in that could possibly mean his income for that year increases by £100k.
Could that mean him having to pay higher rate tax on some of it, even though that increase in value has been over (maybe) 30 years ?

dunstonh

If he cashed it in that could possibly mean his income for that year increases by £100k.
Could that mean him having to pay higher rate tax on some of it, even though that increase in value has been over (maybe) 30 years ?

There would be top slicing relief likely available that will reduce the impact but potentially, yes, a full surrender could take him into higher rate tax.

It may be worth encouraging him to keep it.  He has 100% FSCS protection on it with no upper limit.   It has been far better than cash savings in terms of return.   It's not included in any means-tested benefits and is not subject to local authority care means testing.     It is a doddle for an executor to deal with on his death.   So, its not saving any time or complications by getting rid of it.

Mothman

As it's over a £100k would it also effect their personal allowance for the tax year. Just a thought.

Linton

Mothman said:

As it's over a £100k would it also effect their personal allowance for the tax year. Just a thought.

That is where "top slicing" comes in.  If the effect of the withdrawal is to put one into a higher tax band the gain is  divided by the number of years one is invested when calculating the tax due (over-simplifying to give the general picture).

dunstonh

Linton said:

Mothman said:

As it's over a £100k would it also effect their personal allowance for the tax year. Just a thought.

That is where "top slicing" comes in.  If the effect of the withdrawal is to put one into a higher tax band the gain is  divided by the number of years one is invested when calculating the tax due (over-simplifying to give the general picture).

Although top slicing doesn't stop the reduction of the interest allowance from £1000 to £500.   So, a surrender could result in a basic rate taxpayer finding their interest allowance reduced as if they are a higher rate taxpayer even though they are not.

Mothman

Linton said:

Mothman said:

As it's over a £100k would it also effect their personal allowance for the tax year. Just a thought.

That is where "top slicing" comes in.  If the effect of the withdrawal is to put one into a higher tax band the gain is  divided by the number of years one is invested when calculating the tax due (over-simplifying to give the general picture).

Yes, I understand 'top slicing relief', however I had assumed the product was an onshore investment bond which had already been deemed to have paid basic rate tax. Therefore if the gain had been acrued over 30yrs whilst there may be no additonal tax to pay on the gain (subject to their other income of course), the loss of personal allowance could mean they may have additional tax to pay elsewhere.

My apologies if I have misunderstood the product in question and it is not an onshore investment bond.

sjw11

So, a little more detail about this: 
Premiums of £23500 were paid into this policy, currently leading to a gain of around £102,000.
I understand that Top Slicing Relief would apply but no idea how this would be calculated or what effect that would have. However this policy has run for 34 years.
Other incomes are State and private pensions putting him obviously into the basic rate tax band.
I've no idea if this is classed as onshore or offshore investment, but I suspect since it is old and The Pru, it will be onshore.
All comments gratefully received 

poseidon1

Regrettably, as you will see from the worked examples of top slicing relief (tsr) taken  from HMRC'S taxation manual ( link below ) the calculation can be particularly turgid.

https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm3850