Slicing and dicing
If you have an investment bond, you are generally allowed to draw out 5% of the original capital each year without triggering a tax charge. If you draw more, it’s taxable – and if you cash the whole bond in, you’ll pay tax on a gain over the amount invested. If it’s a UK bond, 20% tax will be treated as paid already, and you’ll only be liable to higher rates.
A recent case highlighted a pitfall. It’s common for these bonds to be sold as a series – 20 ‘segments’ of £10,000 rather than one lot of £200,000. So if you take out £40,000, is that 20% of each of the bonds – with a tax charge on the excess over 5%, £30,000 – or is it perhaps the whole of some of them, in which case you work out whether you’ve actually made a gain or not?
The taxpayer said he’d cashed in some segments completely, but the paperwork didn’t bear it out. The judge said it was ridiculous that there was significant tax to pay when the investments hadn’t gone up in value, but that was the law.
If you have investment bonds and you’re thinking of cashing them in, we can advise you on how much tax you will pay – and how you can minimise that.