Tax treatment of Capital Investment Bond withdrawls

MemorableOstrich696

We opened a joint Standard Life Capital Investment Bond in 2005 with an initial investment of £42,600. We've not touched the money (which has grown to £105,000) but retired this year and want to make withdrawls as tax efficiently as possible.
The SL literature accompanying the most recent valuation states' Gains and income earned within a bond are taxed at 20%. This means that unless you are a higher rate or additional rate taxpayer at the time of taking money out of the bond, or the bond takes you into the these tax brackets, then there is no further tax to pay. It also states that withdrawls of up to 5% a year are allowed without incurring an IMMEDIATE tax charge & that if the allowance is unused in one tax year it can be carried over to the following year. We currently only receive a small personal pension of £11,500 each (not SP age yet).
My interpretation of the above is that providing we only withdraw 5% per year (calculation 105,000 x 5% = £5,250) we won't have to pay any additional tax (of Capital Gains) as no 'chargeable event will have occurred'. Is this & the calculation correct please?

masonic

The 5% per year deferred tax allowance is cumulative, and it's of the original value, not including growth. Since you've not touched for 20 years, you have built this up to 100% of the initial bond value. What you withdraw gets added on to your gain, so it is a deferral, which might not make the most sense if you currently have a low income. You can think of it like taking out your original capital but leaving all of the gain to be taxed later. The alternative is to cash in some of the segments of the bond to generate a chargeable event upon which there is no additional tax to pay if you limit your withdrawals to remain in the basic rate band.

There is also top-slicing relief to consider, so you may find you can withdraw a lot more than you would have thought without incurring additional tax, or leaving a tax liability for the future.

poseidon1

In theory you should be able to take up 100% of your original investment ( £42,600 ) without triggering a 'chargeable event gain'. 

Thereafter, any future withdrawals would trigger a chargeable event, but with the benefit of top slicing relief  you should in theory have plenty of basic rate headroom to avoid income  tax charges thereon, depending on quantum of future withdrawals - 

See below a previous thread on the subject 

https://forums.moneysavingexpert.com/discussion/6611363/20-year-old-investment-bond#latest

As reccomended in that thread and before taking action, I would strongly suggest you contact the life company first to get their reccomendations on how best to structure your intial £42,600 withdrawal, ie should this be by way of pro rata encashment across all policies or full surrender of whole policies.

 Also timing of withdrawals relative to your policy anniversary year can also be an issue with regard to the occurrence and quantum of future chargeable events. Your aim will be always to stay comfortably within your joint basic rate tax headroom, even if this means taking your withdrawals over a few tax years if need be.

Hopefully it will be your plan to decant future unspent  bond withdrawals into ISAs, to simplify your tax profile going forward.

dunstonh

My interpretation of the above is that providing we only withdraw 5% per year (calculation 105,000 x 5% = £5,250) we won't have to pay any additional tax (of Capital Gains) as no 'chargeable event will have occurred'. Is this & the calculation correct please?

If you are a low earner and have plenty of basic rate band available, then that method is probably not the best option.  Surrendering policy segments could well be the most efficient option here.  Not the 5% deferral method as that can store up a tax liability for later.

Combining bed & ISA with the onshore bond could really help long term too, as it would improve returns on a like-for-like basis.

As reccomended in that thread and before taking action, I would strongly suggest you contact the life company first to get their reccomendations on how best to structure your intial £42,600 withdrawal, ie should this be by way of pro rata encashment across all policies or full surrender of whole policies.

Standard Life will not give that advice.  They don't have the regulatory permissions.