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.....