Question
I have an prudential investment bond which I am going to cash in the full amount of the policy soon.
I paid in £14,500 and the surrender valuation is at the moment £18,200. As I am a higher tax payer what tax would I be liable for in surrendering this policy and would I be better off doing a partial surrender to pay less tax?
I have had this policy since October 2000 and have not made any withdrawals from the policy to date.Answer
The tax calculation process on surrender of an investment bond is called 'top-slicing'. You can read more about it on our life investments page, but a quick overview below.
We start by calculating a top-slice, effectively any profit you've made on the bond divided by the number of years you've owned it. This is added to your income and the proportion of top slice falling into your basic/higher rate tax bands dictates the tax owed on the overall gain.
Investment bonds held onshore, as yours very likely is, are effectively taxed at basic rate within the fund, so basic rate tax is already deemed to have been paid. But any top-slice falling into the higher rate tax band will be subject to the difference between basic and higher rate, i.e. 20% tax, multiplied by the number of complete years you've owned the bond.
In your case the profit is £18,200 less £14,500, i.e. £3,700. As there are no withdrawals to worry about we divide this by the 11 complete years you've owned the bond to give a top-slice of £336.
Given you're a higher rate taxpayer the slice will obviously fall entirely in your higher rate band, so you're liable for extra tax on the full top-slice (or, in other words, the full £3,700 profit).
So the £336 top-slice is taxed at 20% to give £67.20 and this is multiplied by 11 years to give a £739 tax bill.
If your income falls back into the basic rate tax band in future, surrendering the bond then could avoid some/all of this extra tax. Otherwise there's little reason to partial surrender unless you'd prefer to spread the tax bill over time or believe the higher rate of income tax will fall.
I have an prudential investment bond which I am going to cash in the full amount of the policy soon.
I paid in £14,500 and the surrender valuation is at the moment £18,200. As I am a higher tax payer what tax would I be liable for in surrendering this policy and would I be better off doing a partial surrender to pay less tax?
I have had this policy since October 2000 and have not made any withdrawals from the policy to date.Answer
The tax calculation process on surrender of an investment bond is called 'top-slicing'. You can read more about it on our life investments page, but a quick overview below.
We start by calculating a top-slice, effectively any profit you've made on the bond divided by the number of years you've owned it. This is added to your income and the proportion of top slice falling into your basic/higher rate tax bands dictates the tax owed on the overall gain.
Investment bonds held onshore, as yours very likely is, are effectively taxed at basic rate within the fund, so basic rate tax is already deemed to have been paid. But any top-slice falling into the higher rate tax band will be subject to the difference between basic and higher rate, i.e. 20% tax, multiplied by the number of complete years you've owned the bond.
In your case the profit is £18,200 less £14,500, i.e. £3,700. As there are no withdrawals to worry about we divide this by the 11 complete years you've owned the bond to give a top-slice of £336.
Given you're a higher rate taxpayer the slice will obviously fall entirely in your higher rate band, so you're liable for extra tax on the full top-slice (or, in other words, the full £3,700 profit).
So the £336 top-slice is taxed at 20% to give £67.20 and this is multiplied by 11 years to give a £739 tax bill.
If your income falls back into the basic rate tax band in future, surrendering the bond then could avoid some/all of this extra tax. Otherwise there's little reason to partial surrender unless you'd prefer to spread the tax bill over time or believe the higher rate of income tax will fall.
Read this Q and A at http://www.candidmoney.com/questions/question616.aspx
No comments:
Post a Comment