With Profits Income Bond - Income and Capital Gains Tax

Hi, I am looking for some clarification regarding my With Profits Income Bond and the “5% rule”. I invested £10k in August 2000 and the current surrender value is £21k. I think that the 5% rule allows annual tax-free withdrawals of up to 5% without incurring any income tax liability. Also, and this is the key issue, for any year where the withdrawal is less than 5%, any unused allowance can be carried forward and there is no time limit on the carried forward allowance. Therefore, if my understanding is correct, in simple terms, after 20 years where there have been no withdrawals, full surrender of the bonds would be free of income tax (5% @ 20 years = 100%). Also, as a basic rate tax payer there would no Capital Gains liability? Confirmation/clarification much appreciated. Many thanks

Hi JonF41,
As there have been withdrawals, the gain from the policy will have a notional tax of 20%.
When the gain, added to your income means that you are still a basic rate taxpayer, the notional tax will cover the extra tax payable, so that there is no further tax.
If the gain is less than £10000, you should sent the chargeable event certificate to:
H.M. Revenue and Customs Pay As You Earn BX9 1AS.
If more than that or you complete a Self Assessment tax return, it should be reported in the tax return at SA101 in the section for "Gains from life insurance policies, capital redemption policies and life annuity contracts.
Thank you. 

 

Many thanks.....

Ref the post by JonF41 above can you please confirm whether the supposition in his fifth paragraph ("Therefore...) would be correct . I.e that, if there had been no withdrawals or other "chargeable events" for a period of 20 years or more, then on full surrender of the bond the accumulated annual 5% allowances would total 100% and no income tax would be payable? If that were the case would it still be necessary to declare the payment on the self assessment form?

Hi Alfie M01,
A partial surrender of 5% of accumulate premiums can be made in each policy year without an immediate tax charge.  
The tax charge is deferred until the next chargeable occasion or until the policy matures.  
If there are no partial surrenders the gain will be taxable when the policy matures.
Have a look at:
 IPTM3540 - Calculating gains: part surrenders and part assignments: ‘periodic calculations’ and ‘excess events’: general and for full surrenders,
IPTM3528 - Calculating gains: maturity, full surrender or assignment: commission rebated: examples.
Thank you.

Question. In relation to the comment posted by "HMRC admin 25" above "When the gain, added to your income means that you are still a basic rate taxpayer" I interpret this as meaning the profit from the sale of a bond counts towards your income tax threshold. For example, if someone had an annual income of 50K (below the upper income tax threshold) and sold a bond with a profit/chargeable event gain of 10 K, they would be determined to have an income of 60K and, therefore, would now be in the upper-income tax range of 40%. Therefore they would be liable to pay 40% ie 4K tax on the profits of the bond sale (not accounting for the small proportion of that would be taxed at the low rate (20%) to get up to the actual threshold). Is that correct?

Hi,
You are correct.
Thank you.