Chargeable event gain

Hi I invested £150k in a bond 10 yrs ago and made no withdrawals during this time. This year March 2024 I had to withdraw £95k out. I received a chargeable event certificate from the company in March 24, which I forwarded to HMRC. During Dec 24 I received a letter from HMRC informing me that my chargeable event income gain was above £10000, I would now be required to complete a self assessment tax form. My question is what do I have to pay tax on:- 1) Amount of gain arising from this event is £32k 2) Notional tax is £6.5k I am a 20% tax payer with state pension and private pension well below the 40% tax bracket. Is it 20% of the £6.5K and how do I include this on the SAT form as Ive never filled in one before Regards

Hi Davidjl,
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Thank you.

   

Hi Davidjl, It sounds like you may have an investment bond structured as a single premium life insurance policy, which is entitled to "notional tax treated as paid" - that is, a tax credit based on the investment company having paid tax over the course of the investment, which entitles you to pay less tax on the gain now. However, do remember that this is just a guess I'm making based on your word choices in an anonymous forum post, and you should satisfy yourself it does actually apply to you, or take professional advice. Unfortunately the tax situation is quite complicated to understand. However, if you are filling in your tax return online, provided you track down all the right boxes, it should do all the calculations for you. First, to run through why it is so complicated: 1) You have made a gain of £32k - this is £32k of extra income on top of the rest of your income for the year. 1a) If the +£32k does not put you into higher rate tax, things are actually simple. You're taxed at 20% on the gain, but you have 20% "notional tax treated as paid" on the gain which exactly offsets this. You pay no extra tax. 1b) But +£32k is an amount that could easily put someone with other income into higher rate tax. If so, you pay 40% tax on the portion of the gain in the higher rate band. The 20% "notional tax treated as paid" covers half of it. 2) It's not ideal that you are being taxed all in one year on gains built up over 10 years... and there is a relief, called "top-slicing relief" which may apply. It applies if the total bond gain pushes you into higher rate, but one-tenth (based on it being a gain over 10 years) does not. The calculation is hard but the website should do it for you. Which brings us back to filling in the website form... To find the relevant boxes: In "tailor your return" say yes to "other UK income... life insurance gains" In the "other income" section that unlocks, say yes to "Gains from life insurance policies" On the subsequent pages report the gain (£32k) and the number of years involved. Now finish off the rest of the return, and hopefully the calculation it displays at the end will make sense, given the rest of my message!

Further to the reply by maxb, If case 1b) applies, then you may now become a "higher rate tax payer" even though in some sense you may not be paying any tax at a higher rate. From the top-slicing relief in (2), you may get top slicing relief equal to the tax which is apparently payable on the Chargeable event, so that the net result is that there is no extra income tax to pay due to the Chargeable event. However, if you become a "higher rate tax payer", then your "Personal Savings Allowance" will become £500 instead of £1000. See https://www.gov.uk/apply-tax-free-interest-on-savings If you have bank interest of over £500 then there will be additional income tax to pay on your bank interest. (In my case I had a chargeable event which pushed total income into higher rates. Top slicing relief resulted in no extra tax being paid on on the chargeable event, but total income tax for the year went up by £100, which was 20% (the basic rate) of the difference between £500 and £1000). I haven't seen any mention of this effect in HMRC guidance. 

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Also, for gains arising from 6th April 2021 onwards, HMRC changed details of how lost Personal Savings Allowance and Starting Rate for Savings interact with top slicing relief - previously they were just lost, now they are accounted for within the calculation in a way which grants back some of the lost tax efficiency as extra top slicing relief. Reference: https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm3820 So if you have example calculations, they'll differ depending on which year's rules they are demonstrating.