Personal Investment plan Tax liability on cashing in

Taraxacum1

We have a joint Halifax (Scottish Widows) PIP.  Its a managed income fund paying us a quarterly income (small). It was taken out in 2010 with £100k invested.  It has never given us the income suggested at point of sale, and we are considering cutting our losses and cashing it in.  Its worth at the moment circa £92k.  We were told when taking it out that there would be no tax liability on the income or on cashing it in at a later date.  However, on checking through this years statement it says we may be liable to tax if we cash it in.  Have the rules changed or were we lied too on taking out the product.  Any advice would be most helpful.

dunstonh

We have a joint Halifax (Scottish Widows) PIP.

The PIP product name (which was internal for Halifax) used on multiple products.   It was used for what we call a GIA (general investment account) and it was also used for their onshore investment bond.  Both have very different taxation.

It has never given us the income suggested at point of sale,

After the credit crunch, yields fell.     UK equity income, which made up much of their income yield, fell off a cliff at that time.  However, recently, yields have increased again.

.  We were told when taking it out that there would be no tax liability on the income or on cashing it in at a later date.    However, on checking through this years statement it says we may be liable to tax if we cash it in. 

What you were told doesn't sound right as both the GIA version and the onshore investment bond version are taxable.  However, its possible that the tax calculation results in zero tax being paid.

Have the rules changed or were we lied too on taking out the product.  

Tax on unwrapped investments (GIA version) changed and onshore bonds are still the same apart from some minor tweaks reflecting the personal savings allowance.

We would need to know which version you have.

Taraxacum1

Thanks, the fund is a Managed Investment Fund in Bonds.

gandalf24

Hi 

Reading this with interest as I have a similar scenario, I took a PIP plan out in 2006 invested £50k in 5 funds now worth around £135k gain of approx. £85k with no previous withdrawals. As you said please see link to Halifax online brochure which states that proceeds of the plan are payable free of any personal liability to UK income tax or capital gains tax . 1_337850-3.pdf (scottishwidows.co.uk). Pages 4-6 are most relevant.
This info is on the Scottish Widows website.

I was also thinking of cashing this in but was concerned about the tax implications on the gain.
I called Halifax/Scottish widows this morning to clarify this and am still none the wiser as they are saying that tax might have to be paid despite what the brochure says, unless I am reading it wrong, so might have to take withdrawals over a few years to remain in 20% tax band to minimize tax paid, also led to believe that if any tax is to be paid it will be paid on the UK tax rate not the Scottish rate which works out more favorable to Scottish Income tax payers.

Also tried to get through to HMRC to get their take on it but with no success.
On the PIP plans there is also the tax deferred withdrawal allowance of 5% per year which accumulates over the years i.e. you have held it for 14 years with no withdrawals so 14 x 5% of initial investments = £70k tax free.
Tax might have to be paid on the remaining amount.
Hopefully someone else more savvy can clarify this and if any tax is to be paid. It is quite a minefield and as you said when making the initial investment I was told the same that there would be no tax liability further down the line.

Taraxacum1

I assume our quarterly withdrawls count as part of 5% pa tax allowance.  These have been about 3.5 to 4% of the original investment per year, so, we should have a accumulated some extra to withdraw without penalty.
Just called the Scottish Widdows admin number and they are going to send me a details of what the tax inplications are.  Be interested to see what they say as HRMC are uncontactable.

Notepad_Phil

Gandalf24, I'd say the important bits from that pdf are

The proceeds of your plan are payable free of any personal liability to UK income tax at the basic rate, or to Capital Gains Tax.

and

There may be an income tax charge if you’re a higher or additional rate taxpayer and a gain arises or if a gain results in you becoming a higher or additional rate taxpayer.

I'm not an expert on these types of bond and on how you calculate the gains and on ways of reducing any tax, but I don't think you'd be the first person to have read the first part and taken it as being free of all tax, but as you can see in the second part there are complexities on what tax if any, you end up having to pay.

Similar paragraphs are likely to have been used in the literature provided to Taraxacum1.

Taraxacum1

Notepad_Phil, yes, my latest literature has very similar ambiguity.

gandalf24

Taraxacum1

Would be grateful if you could share the info on the tax implications that you get from Scottish Widows as when I called them this morning they where pretty vague and unsure, and totally agree about HMRC it seems to be almost impossible to contact them. 

Thanks in advance

Taraxacum1

gandalf24, will do, they said  they would email me the info within 5 working days.

Taraxacum1

Well, got the reply, they never answered the question. Just a load of speel about what the fund is invested in - which I already knew.  Nothing on tax liability, will call them again on Monday.

When we took out the product I suspect we were lied too about there being no tax liability.  Looks like we will need to pay an accountant to look at it for us.  Don't you just love and trust banks!

Beddie

In that document: "free of any personal liability to UK income tax at the basic rate" and
"There may be an income tax charge if you’re a higher or additional rate taxpayer and a gain arises or if a gain results in you becoming a higher or additional rate taxpayer."

 It should have explained more clearly how you can end up paying higher rate tax on the gain.  But these were complex products and I doubt a single customer ever fully understood it. Hopefully you'll get a clear answer at some point from the provider.