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Tax on investment drawings
kajman
Posts: 20 Forumite
My parents moved into a private care home last year. My siblings and I as powers of attorney have sold their house and are using the funds to pay the care home fees. If we decide to invest the money to get some returns and then draw down regularly for the fees, does this count as income for tax purposes?
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Comments
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Drawing down won't but any gains on shares or any interest on cash, will.0
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My financial advisor is looking at bond investments and he has indicated that tax is due on the money taken out (withdrawn) rather that the rise in value of the bonds, but only if parents' income puts them into the higher rate tax band (40%).
I am waiting for a fuller explanation from him, but in the meantime I wondered if someone has experience of this. It seems very unfair if you invest, and then when you withdraw (mainly the capital) you get taxed on it.0 -
What sort of bond is your advisor talking about?0
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What sort of bond is your advisor talking about?
Sounds like it's an onshore insurance bond:
https://www.pru.co.uk/investments/investment-articles/guide-to-investment-bonds/
I'm not endorsing (or the opposite), either Prudential specifically or this type of product generally; but it's a useful link to get an introduction to the product.
It would be worth looking carefully at the fees charged by the product, and at what the financial adviser gets from it. Also note that within the bond, tax is deducted at 20% from returns - which is why a basic rate taxpayer has nothing further to pay.0 -
he has indicated that tax is due on the money taken out (withdrawn) rather that the rise in value of the bonds
By the way, this can be the case (when a "part surrender" is done) but often there are ways around this - particularly by dividing the bond into many small segments so that when you take out cash, you only encash a whole number of segments. Then the tax generally is on the gain rather than the withdrawn amount.
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/taxation-uk-investment-bonds/0 -
My financial advisor is looking at bond investments and he has indicated that tax is due on the money taken out (withdrawn) rather that the rise in value of the bonds, but only if parents' income puts them into the higher rate tax band (40%).
I am waiting for a fuller explanation from him, but in the meantime I wondered if someone has experience of this. It seems very unfair if you invest, and then when you withdraw (mainly the capital) you get taxed on it.
Thats a slightly different question/situation to the one asked.
If you sell your house, there's no tax to be paid if you then take that money out of wherever it is.
However, irrespective where the money came from, if you have investments there will usually be tax to be paid on the gain and/or income from those investments. What that tax is, is determined by the nature of the investment, the gain and the income (it may fall below threshholds and there be none) and its amount, but its nothing to do with the source of the money having come from a house sale.
I dont understand your point about it being "unfair" to tax the money.
The money itself isn't being taxed, its the gain and the income, same as everyone is taxed on gains and income perspective where the money originated from. It could be no other way for obvious reasons.0 -
AnotherJoe wrote: »I dont understand your point about it being "unfair" to tax the money.
The money itself isn't being taxed, its the gain and the income, same as everyone is taxed on gains and income perspective where the money originated from. It could be no other way for obvious reasons.
In general yes, but the taxation of partial surrenders of insurance bonds (above the 5% allowance) is pretty nasty and can reasonably be characterised as "taxing the money withdrawn, rather than the gain". See the link in my post #6:PruAdviser wrote:It should be noted from above that where the cumulative 5% allowance is exceeded, the resultant gain bears no correlation to the economic performance of the bond. Instead the gain is simply a mechanical calculation comparing the part surrender proceeds to the 5% allowance.
Now you can write to HMRC and ask them to waive this and do something more sane, but ideally you wouldn't leave it to their discretion.
All that said, this is fairly easy to get around with foresight - i.e. instead of one large insurance bond you purchase lots of bite-sized segments, so you can avoid ever partially surrendering a segment. A bit surprising that kajman's adviser isn't just steering down that path rather than quoting the scary consequences of not doing so!
To reiterate, before getting into an insurance bond, kajman should definitely read up and come to a conclusion on whether they're a better fit for the situation than simpler investment vehicles.0 -
londoninvestor wrote: »In general yes, but the taxation of partial surrenders of insurance bonds (above the 5% allowance) is pretty nasty and can reasonably be characterised as "taxing the money withdrawn, rather than the gain". See the link in my post #6:
Now you can write to HMRC and ask them to waive this and do something more sane, but ideally you wouldn't leave it to their discretion.
All that said, this is fairly easy to get around with foresight - i.e. instead of one large insurance bond you purchase lots of bite-sized segments, so you can avoid ever partially surrendering a segment. A bit surprising that kajman's adviser isn't just steering down that path rather than quoting the scary consequences of not doing so!
To reiterate, before getting into an insurance bond, kajman should definitely read up and come to a conclusion on whether they're a better fit for the situation than simpler investment vehicles.
All very good info for the OP, but again thats down to the choice of investment product, nothing to do with the parents house sale proceeds being taxed.
I know nothing of these bonds presumably they have something going for them given this tax treatment and need to be careful how you buy them?0 -
AnotherJoe wrote: »All very good info for the OP, but again thats down to the choice of investment product, nothing to do with the parents house sale proceeds being taxed.
Agreed - it's post #3 that has the reveal, rather than the original post.I know nothing of these bonds presumably they have something going for them given this tax treatment and need to be careful how you buy them?
I'm far from an expert on this either - some of the IFAs who post here will know much more. One of the main advantages as I understand it is that they work quite well with trusts for inheritance planning.
https://www.ftadviser.com/investments/2018/03/20/five-questions-you-should-ask-about-onshore-bonds/?page=40 -
The OP may find below of use when considering options.
https://www.moneyadviceservice.org.uk/en/articles/using-investment-bonds-to-pay-for-your-long-term-care0
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