Investment Bond Captial Gains Tax query

christmaspudding81

I urgently need advice on capital gains tax for my joint share of a £130,000 Pru investment bond, which needs to be liquidated after my house sale now I am divorced. I'm a low earner (£25k/year) with two children, and this money is crucial for my new home, as agreed in my divorce. I also have an IVA of £30k which I am paying off too now I have some money from the house sale. 

I naively thought it would be tax-free like an ISA, but I'm now facing a potential £50,000 tax bill, which my ex-husband's financial advisor mentioned. My new home completion is imminent, and I'm worried about being short.

Can I mitigate this by not cashing it all in this year, or by reinvesting a portion? My father is gifting me £30k; will this be taxed? I can't get a mortgage and I need a new home with the proceeds from my divorce. Please advise on strategies or direct me to a suitable expert.  Or how they work the captial gains tax out, so I can do the maths?

My share in bond is 13000 cash in value

My proceeds from house share are £295,000

My ISA is 30,000

I earn £25000 at year full time employment

My dad maybe giving me 30,000 to be decided

I am needing 390000 to purchase my new home.

I have no other assets or savings

Many thanks

Dazed_and_C0nfused

christmaspudding81 said:

I urgently need advice on capital gains tax for my joint share of a £130,000 Pru investment bond, which needs to be liquidated after my house sale now I am divorced. I'm a low earner (£25k/year) with two children, and this money is crucial for my new home, as agreed in my divorce. I also have an IVA of £30k which I am paying off too now I have some money from the house sale. 

I naively thought it would be tax-free like an ISA, but I'm now facing a potential £50,000 tax bill, which my ex-husband's financial advisor mentioned. My new home completion is imminent, and I'm worried about being short.

Can I mitigate this by not cashing it all in this year, or by reinvesting a portion? My father is gifting me £30k; will this be taxed? I can't get a mortgage and I need a new home with the proceeds from my divorce. Please advise on strategies or direct me to a suitable expert.  Or how they work the captial gains tax out, so I can do the maths?

My share in bond is 13000 cash in value

My proceeds from house share are £295,000

My ISA is 30,000

I earn £25000 at year full time employment

My dad maybe giving me 30,000 to be decided

I am needing 390000 to purchase my new home.

I have no other assets or savings

Many thanks

Do you really mean Capital Gains tax?

christmaspudding81

Capital Gains tax yes - I need to know how much it will be will it be that high £50k on a £130k bond the tax and if so is there anyway of lowering it - if I use some towards paying off my debt etc or anything

christmaspudding81

Just wondering what is the point of investing money in a bond if you only get lose 45% of the intial investment so much in tax?  Unless I am misunderstanding?

masonic

Taxation of investment bonds is complex. It would be a chargeable event gain that is taxable as income. This may be helpful if it's an onshore bond https://www.mandg.com/pru/customer/en-gb/our-products/investment-products/uk-bond-tax

The actual amount of tax would depend on what top-slicing relief you can claim, and if onshore, 20% tax is treated as already paid. If this money is required before the end of this tax year, I don't see any way of reducing the liability.

masonic

christmaspudding81 said:

Just wondering what is the point of investing money in a bond if you only get lose 45% of the intial investment so much in tax?  Unless I am misunderstanding?

The idea is not to cash in more than would exhaust your basic rate tax band plus top-slicing relief in a single tax year.

christmaspudding81

Ie how can the captial gain tax be £50000 on a 130000 bond for the approx capital gains tax I need to pay to tax man > It sounds so high have I been misinformed by the financial advisor - this isn't direct from Pru I am getting so much information on internet it's so confusing  - is it 45% or 20% and does it cover the intial investment?

Dazed_and_C0nfused

christmaspudding81 said:

Ie how can the captial gain tax be £50000 on a 130000 bond for the approx capital gains tax I need to pay to tax man > It sounds so high have I been misinformed by the financial advisor - this isn't direct from Pru I am getting so much information on internet it's so confusing  - is it 45% or 20% and does it cover the intial investment?

As @masonic has already mentioned, this doesn't appear to be a Capital Gains related thing.

masonic

christmaspudding81 said:

Ie how can the captial gain tax be £50000 on a 130000 bond for the approx capital gains tax I need to pay to tax man > It sounds so high have I been misinformed by the financial advisor - this isn't direct from Pru I am getting so much information on internet it's so confusing  - is it 45% or 20% and does it cover the intial investment?

Investment bonds are not subject to capital gains tax, they are subject to income tax. You give up a lump sum to the provider in exchange for an income. You can take an income of up to 5% of the amount you paid in per year as a tax free income and any unused amount is carried forward.

I don't know where the £50,000 figure has come from but your share of the tax won't be £50,000 if its only worth £130,000. Perhaps it is £50,000 on the whole £260,000.

How many years has the bond been held and have any withdrawals been made before now?

christmaspudding81

Thank you for this - I will read this article it is an uk bond opened in 2016 - a figure of £35,000k would be my share of the tax already paid I think leaving around 90K left liable for captial gains tax  - would this be paid at 20% or 45% ie what someone who is a higher earner would pay  ? I am reading this -  "For higher earners * I am not but this will take me into the bracket for one year*  the levy is currently 24% on gains from selling additional property, or 20% on profits from other assets like shares"

dunstonh

There is no capital gains tax on investment bonds.  It's one of the advantages of that tax wrapper.

Gains are taxed under the income tax bands with the benefit of top slicing relief.

Can I mitigate this by not cashing it all in this year, or by reinvesting a portion?

Yes.   If you only surrender sufficient policies that the gain remains in the basic rate band after top slicing relief, then you can repeat surrenders in future years on the same basis.

Has the investment bond been assigned to you yet or is it still in joint names?
if it is still joint and not assigned, then any surrenders would be split under both you and your ex.

Ie how can the captial gain tax be £50000 on a 130000 bond for the approx capital gains tax I need to pay to tax man > It sounds so high have I been misinformed by the financial advisor - this isn't direct from Pru I am getting so much information on internet it's so confusing  - is it 45% or 20% and does it cover the intial investment?

Putting aside that there is no capital gains tax on investment bonds.....
It is highly unlikely that an investment bond valued at £130k could have a £50k tax bill.  It may have a £50k chargeable gain but that doesnt equal £50k in tax.

Is this an onshore bond or an offshore bond?  (Prudential would be onshore.  Prudential International would be offshore)
Has the policy been assigned to you yet or is it still held jointly?
Is the £130k your share or the value before the split?
What was the original investment value?
Was there any surrenders or withdrawals over the period the bond was held?