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Case study: Rectifying an unadvised investment bond withdrawal


The problem: Without your knowledge, a client has taken it upon herself to take a large ‘one off’ withdrawal from her investment bond unaware that when cumulative 5 per cent allowances are exceeded, the resultant gain bears no correlation to the investment performance of the bond. Her significant partial withdrawal has therefore inadvertently created a chargeable event gain.

The solution: The facts are as follows. On 1 May 2009, the cliebt invested £100,000 into a UK bond. On 1 December 2012, she withdrew £60,000 across all the segment. The cumulative 5 per cent allowance is £5,000 x 4 or £20,000 which results in a gain of £40,000.

It would have been more tax efficient to fully surrender individual segments than take a withdrawal across all segments.

However, history cannot be rewritten and HMRC states: “A withdrawal will be legally effected as surrenders or part surrenders of policies in accordance with the terms of the policies and the instructions of the policyholder or a person authorised to act on behalf of the policyholder, such as an IFA. Once a surrender or part surrender of a policy has been validly made, it cannot be reversed. The tax consequences must follow from the transactions which have happened, not those which in hindsight a policyholder might have preferred to have happened because they would give a lower tax bill.”

Explain to the client that a partial surrender gain arises on the last day of the insurance year, and in her case, the gain of £40,000 arises on 30 April 2013. If this is followed by a full surrender in the same tax year then the partial surrender gain is ignored, and instead the proceeds are brought into the final surrender gain calculation. This works as follows:

The client fully surrenders the bond prior to 6 April 2014 for £55,000. The partial surrender gain above is ignored, and instead the calculation on final surrender will be as the proceeds  of £55,000 are added to the previous withdrawals of £60,000. The premium paid was £100,000 which means the gain arising when bond encashed if £15,000.

The planning doesn’t stop there.

Although the client is a basic rate taxpayer, the gain will be treated as forming the highest slice of total income.

As the client is on the cusp of higher rate tax and accordingly the gain will push the client into the higher rate.

Top slicing relief relief will, of course, assist in reducing the rate of tax charged by applying a spreading mechanism. The relief is available because the client does not pay higher rate tax on other income (excluding the gain) but, when the gain is added, she becomes subject to higher rate tax.

The benefits of top slicing can be enhanced if Julie makes a personal pension contribution which has the effect of extending her basic rate band by the gross contribution. Accordingly, if she makes a contribution in the same tax year of her chargeable event gain arising (2013/14), this could prevent her top sliced gain from breaching the basic rate threshold.

Graeme Robb is technical manager at Prudential 


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