Top slicing advice. Partially surrendered onshore bond.

lohr500

Hello all,

I've done some searching both on the MSE forum and vis Google, but I am struggling to find answers.

Background : 

Mother has an onshore bond opened 5th May 2001 with £35,000. No further additions.
Value in January 2024 £83,000

£40,000 partial surrender in February 2024 which resulted in a Chargeable Gain notification on 4th May 2024 of £5000, amount of tax treated as paid £1000. (Presumably because she used up the full 5% p.a surrender allowance, up to 100% maximum, on the original £35,000 investment over the 23 years, so the additional £5000 became a gain)

For 2024/2025 tax year she is a basic rate income tax payer with total taxable income before the bond surrender of £15,000.

Based on the above I rightly or wrongly assumed she should have no additional tax liability from the £5000 chargeable gain. 

Moving forward, she now wants to surrender the balance of the bond which will be valued at around £45,000.

Questions : 

Am I right in thinking if she surrenders the £45,000 balance, the full £45,000 will be considered a chargeable gain?

Does the full £45,000 count towards her taxable income for the tax year, or does "Top Slicing" apply, allowing her to divide the £45,000 by 24 years = £1875 gain?

Any feedback would be appreciated. Thanks

poseidon1

See below link outlining the technicalities of investment bond taxation

https://techzone.abrdn.com/public/investment/top-slicing-relief

On the figures you give for your mother's 2024/25 tax position there certainly could  be some 40% tax exposure if the entire bond is encashed in the current year -  looks as if the  £45k  bond value is pure gain with a tax credit thereon at 20%. Top slicing would certainly be needed to mitigate the situation.

Simple solution therefore,  is to split the encashment  ( £22,500 each)   across this tax year and the next ( only a couple weeks to await the new tax year).  

In this way and worse case, only £22,500 gain is added to your mother's income for the current year, so even without topslicing relief she remains comfortably within the 20% tax band , and your mother gets the 20% tax credit deemed already paid within  the bond to satisfy her 20% tax exposure thereon.

 Rinse and repeat for 2025/26,  assuming your mother's other  sources of  taxable income for the new tax year will be similar.  

Incidentally was your mother a 40% tax payer at time she originally bought the bond? As  investments these bonds  tend to be more advantageous to  higher rate tax payers who in later years ( retirement?) become lower rate tax payers. 

lohr500

@poseidon1 Many thanks for your reply which is very helpful.

I think your suggestion to split the encashment is the way forward.

The only question I have is on the timing : 

When she encashed the £40k back in February 2024, the Chargeable Gain Certificate was dated 4th May 2024 which coincided with the annual maturity date since creation..

Is the tax liability based on the date of encashment, or the date of the Chargeable Gain Certificate?

If the former, then no problem encashing £22,500 immediately and then £22,500 in April.

If the latter, then I think we would need to wait until after 5th May 2025 to encash the balance of the bond to avoid getting a second Chargeable Gain Certificate on the 4th May covering the second £22,500 encashment .

I am pretty sure she would have been a 40% tax payer when the bond was taken out. 

Thanks again for your help.

poseidon1

lohr500 said:

@poseidon1 Many thanks for your reply which is very helpful.

I think your suggestion to split the encashment is the way forward.

The only question I have is on the timing : 

When she encashed the £40k back in February 2024, the Chargeable Gain Certificate was dated 4th May 2024 which coincided with the annual maturity date since creation..

Is the tax liability based on the date of encashment, or the date of the Chargeable Gain Certificate?

If the former, then no problem encashing £22,500 immediately and then £22,500 in April.

If the latter, then I think we would need to wait until after 5th May 2025 to encash the balance of the bond to avoid getting a second Chargeable Gain Certificate on the 4th May covering the second £22,500 encashment .

I am pretty sure she would have been a 40% tax payer when the bond was taken out. 

Thanks again for your help.

The policy anniversary date does complicate things here.

  If you look at the example for James in the technical guide below, a part encashment in March (2024) in one scenario triggered an effective chargeable tax reporting event in the following tax year, aligning with his policy anniversary date, but this was based on the manner in which the encashment took place. In the first scenario he partly encashed across all 100 segments of his bond. 

https://techzone.abrdn.com/public/investment/prac-guide-mitigate-a-bond#anchor_2

For your mother to achieve a part encashment that will be treated as effective in the current tax year, she has to encash entire segments of her bond ( rather than partials). That is to say if she has 100 segments, she has to sell 50 whole segments, as outlined in the 2nd scenario of the James example above.

You should approach the life company to confirm whether structuring her disposal in this way would actually lock that gain to the current tax year, but the outcome of your mother's previous part encashment in February 2024 seems to suggest she still has all 100 segments intact after her first withdrawal, with their individual values merely decreased proportionally.

As to the timing of the sale of her remaining 50 segments, again confirm with the life company whether that would need to be delayed until after the May 2025 policy anniversary date to ensure a 2025/26 chargeable event arising thereon.

As an observation and since there may be a bit of a delay in final encashment, depending on the nature of the funds the bond is invested ( equities?) your mother may have noticed unit values have been falling of late.

 Therefore as regards the delayed  final encashment for remaining bond segments, would suggest your mother consider whether it would make sense  for her remaining segments  be transferred to a less volatile fund (such as cash)  pending  final disposal. Does she still have access to  professional advice in this regard?

lohr500

Thanks again @poseidon1.

Before seeing your latest reply, I helped her this morning on the phone to arrange for a partial encashment of £30,000 today. She was keen to access the cash before this fiscal year end to gift to grandchildren for them to put into their 2024/2025 ISA allowances.

As you mentioned, they gave her the option of reducing all the segments by an equal amount, or cashing in specific segments entirely.

They quoted two different Chargeable Gain values depending on which encashment option she chose.
£30,000 if the segments were reduced equally, or I think something like £33,500 if individual segments were cashed in completely.

We decided that the £30,000 Chargeable Gain option, plus her other taxable income of £15,000 would keep her safely below the higher 40% tax band.

Having read your reply, if we hadn't already initiated the process, we should perhaps have asked if the choice of options made any difference to the dating of the Chargeable Gain certificate. Live and learn!

I'm pretty sure the Chargeable Gain for this encashment will be dated 4th May 2025 and so fall into the 2025/2026 fiscal tax year. 

So yes, the question will then be what date the Chargeable Gain Certificate will show as and when she decides to cash in the remaining +/- £15,000.
We will wait until 5th May 2025 and then ask the question.If they say it will result in a Chargeable Gain dated 4th May 2026, we can arrange for the balance to be cashed in without any delay. If they say, closing the bond will result in an immediate Chargeable Gain, then she will have to wait until the start of the 2026/2027 tax year.
Or possibly cash in nearly all of it in may 2025, leaving a small balance of say £100 if this forces a 4th May 2026 Chargeable Gain certificate!    

I can look to see if it is possible to move the segments to a less volatile fund, but hopefully we can extricate the remaining £15,000, or the lion's share of it in May this year without getting both the ongoing £30,000 and a further £15,000 falling in the same 2025/2026 fiscal year.

She does have access to professional advice, but I'm not overly impressed by the quality of it.

Looking back on the history of the bond in question, I can't help but think she should have been advised to surrender all of it in February last year and not just £40,000 of it.

If I understand it correctly, the total gain would have been £48,000 over the 22 years of the bond. If Top Sliced, that would give £2181.82 gain p.a. and as such she need not have worried about any additional higher tax rate liability. 
Perhaps i have misunderstood though.

Thanks again for your assistance.

poseidon1

lohr500 said:

Thanks again @poseidon1.

Before seeing your latest reply, I helped her this morning on the phone to arrange for a partial encashment of £30,000 today. She was keen to access the cash before this fiscal year end to gift to grandchildren for them to put into their 2024/2025 ISA allowances.

As you mentioned, they gave her the option of reducing all the segments by an equal amount, or cashing in specific segments entirely.

They quoted two different Chargeable Gain values depending on which encashment option she chose.
£30,000 if the segments were reduced equally, or I think something like £33,500 if individual segments were cashed in completely.

We decided that the £30,000 Chargeable Gain option, plus her other taxable income of £15,000 would keep her safely below the higher 40% tax band.

Having read your reply, if we hadn't already initiated the process, we should perhaps have asked if the choice of options made any difference to the dating of the Chargeable Gain certificate. Live and learn!

I'm pretty sure the Chargeable Gain for this encashment will be dated 4th May 2025 and so fall into the 2025/2026 fiscal tax year. 

So yes, the question will then be what date the Chargeable Gain Certificate will show as and when she decides to cash in the remaining +/- £15,000.
We will wait until 5th May 2025 and then ask the question.If they say it will result in a Chargeable Gain dated 4th May 2026, we can arrange for the balance to be cashed in without any delay. If they say, closing the bond will result in an immediate Chargeable Gain, then she will have to wait until the start of the 2026/2027 tax year.
Or possibly cash in nearly all of it in may 2025, leaving a small balance of say £100 if this forces a 4th May 2026 Chargeable Gain certificate!    

I can look to see if it is possible to move the segments to a less volatile fund, but hopefully we can extricate the remaining £15,000, or the lion's share of it in May this year without getting both the ongoing £30,000 and a further £15,000 falling in the same 2025/2026 fiscal year.

She does have access to professional advice, but I'm not overly impressed by the quality of it.

Looking back on the history of the bond in question, I can't help but think she should have been advised to surrender all of it in February last year and not just £40,000 of it.

If I understand it correctly, the total gain would have been £48,000 over the 22 years of the bond. If Top Sliced, that would give £2181.82 gain p.a. and as such she need not have worried about any additional higher tax rate liability. 
Perhaps i have misunderstood though.

Thanks again for your assistance.

I am pleased the life company were able to quote options for the bond encashments gains depending on whether it was partial or whole segments. Does appear  however, that the option you selected will push the gain into the next tax year which is a bit of a shame bearing in mind all the basic rate headroom your mother has in the current tax year, but c'est la vie.

As to whether it would have been preferable to have totally encashed the bond last year and used top slicing to avoid tax in its entirety, as you have seen, the complicated manner in which these chargeable gains are ascertained and calculated may have been tricky to comprehend at that time.  That said, and as you found today,  the bond provider can provide a certain degree of technical assistance.

Your mother has been  fortunate in having you  handle this bond encashment strategy on her behalf. Also your experience may assist others on this forum.