How much tax on Onshore bond

Channelhugger

My wife has an onshore bond that has gained £160,000 in 25 years since starting it.
She has no other income.
How much tax would she be liable for if she took it all now?
I'm confused with starting rate for savings and personal savings allowance.
Thanks

TheGreenFrog

https://techzone.abrdn.com/anon/public/investment/Taxation-of-bonds#anchor_7

Explains the methodology for the calculation.  top slicing will be relevant for that size of gain if your wife has no other income

Linton

Onshore bond tax is a bit complicated. So a quick summary based on your wife's circumstances so you understand the basics before asking further questions:

I assume she has not withdrawn any of the money  so far and is planning to withdraw the full amount this year. .....

1) It comes under income tax rather than CGT.  Savings allowance is not relevent.  The bond is an investment, not savings

2) The initial investment is taken tax free. The gain is potentially taxable in the year it is taken,

3) It is assumed that basic rate tax has already been paid so only higher rates of tax could be payable.
In this case the gain is £160,000 so your wife could potentially be well into the highest rates of income tax. However a bit of magic called "Top Slicing" comes into effect if the withdrawal leads to a change in tax rate

4) Top Slicing:The gain is divided by the number of years the bond has been in place: £160K/25=£6400.  If this amount of income would not increase the current tax rate then the current tax rate is used.  As your wife would still be under her tax allowance the whole withdrawal is tax free.

poseidon1

Channelhugger said:

My wife has an onshore bond that has gained £160,000 in 25 years since starting it.
She has no other income.
How much tax would she be liable for if she took it all now?
I'm confused with starting rate for savings and personal savings allowance.
Thanks

Link to HMRC's manual on the subject below ( although suspect you may have already seen it).

https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm3820

Applying top slicing relief and allowing for full availability of personal allowance and the personal savings allowance, it looks as if on full encashment the entire £160k gain would be treated as tax paid at 20% with no further liability thereon.

However, I would err on the cautious side and encash only 1/2 the bond in the current tax year  so top slicing relief would bite on a smaller gain,  and cash the remainder in the 2025/26 tax year.

As a precautionary measure you might also consider switching to a low risk cash fund ( to  lock in present gains ) until final encashment in the next tax year.

Channelhugger

Due to unforeseen medical issues (on my part) we're struggling financially, so knowing we can access this bond without tax is such a relief so thanks everyone it's very much appreciated.