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Investment Bond Calculator - work out the top-slice (chargeable event) for up to ten different bonds.

 

Click here to launch the calculator

If you have trouble launching the application, try and temporarily enable pop-up windows. Alternatively, use this link.

This calculator will allow you to calculate the chargeable gain upon encashment of up to ten diffent investment bonds.

Individuals aged over 65 may find it useful to use this calculator in conjunction with the Age Allowance Calculator

Scroll to the bottom of this page to view some worked tax calculation examples.

Investment Bonds are collective investments products with similarities to unit trusts and investment trusts, but with the major difference that these are written under Life Insurance legislation, and are in form (if not entirely in substance) life insurance policies. The Life Insurance element of these products is generally minimal (usually 101% of the value of the investment), with the majority of the original investment applied to investment funds.

There are several types of bonds that are available:

 

  • With-Profits Bonds
  • Unit-Linked Bonds (can invest in a spread of different investment funds)
  • Distribution Bonds
  • Guaranteed / Protected Equity Bonds

 

These bonds can also be issued onshore or offshore (in places such as the Isle of Man or Luxembourg), but the tax-treatment will differ during the lifetime of the policy and upon encashment.

The taxation of these policies can be complex, hence the need for such a calculator. Please note that this tool does not work out personal income tax liabilities - it just works out the top-slice that is added to personal income, and this may or may not trigger an additional tax liability.

Some familiarity with the mechanisms and tax-treatment of investment bonds would be advisable when using this tool. Below is a quick guide to the tax treatment of investment bonds:

Investment bonds are also known as non-qualifying policies, which give rise to no income or capital gains as such in the hands of the investor, and thus provide a means of rolling up investment returns. The underlying insurance funds in which premiums are invested is subject to life company taxation (currently 20% on income). The taxation of bonds differs from other investments in that since the bonds have already borne tax there is no personal liability, either to basic rate income tax or capital gains tax on any profit arising from the investment. However, a liability to higher rate tax may arise on partial withdrawals, or when the bond is ultimately realised for cash. Such liability is related to the 'chargeable gain' (see below). It is possible to withdraw from the bond 5% of the original investment each year (or cumulatively) for each of the first 20 years.

The allowance is treated as a return of capital and it is cumulative in that unused allowances can be carried forward for use in future years.

A chargeable gain is calculated as follows:

 

  • If partial withdrawals are made then the chargeable gain is determined at the end of the policy year when all withdrawals taken in the year are added together. The gain is the amount by which the withdrawals exceed the allowance available, i.e. 5% for the current year plus any unused allowance carried forward from previous years.
  • On final realisation adding the final cash value to the total of all previous withdrawals, and then deducting the initial investment and any previous chargeable gains determine the chargeable gain.
  • The resulting chargeable gain is then taxable as if it were an addition to the investor's income tax rate, but credited with basic rate income tax having already been paid.
  • Therefore only a higher rate taxpayer or a basic rate taxpayer, close to the higher rate threshold, would be liable.
  • 'Top Slicing' relief applies and can save tax when the addition of the chargeable gain to the investor's income takes the income across an income tax threshold into a higher rate tax band.
  • This gain is divided by the number of relevant years to produce an average yearly gain, which is treated as the top slice of income in the tax year in which the gain falls.
  • The tax payable (if any) on the top slice is calculated and multiplied by the relevant years to give the total income tax payable.
  • If the bond is an 'offshore' variety, and the proceeds brought back into the UK, the top-slice will be taxed at the taxpayers highest marginal rate of income tax (lower, basic or higher), but cannot benefit from the tax credit applicable to onshore bonds.

 

Further instructions on how to use the calculator are provided when you launch the tool.

 

Example Tax Calculations

 

The above points may be more easily comprehended by showing a few worked examples.

Assuming an individual has a personal tax allowance of £5,225 in the 2007/8 tax-year, and surrenders an investment bond that he has owned for ten years with a gain of £10,000. The ‘top-slice’ on the gain is £1,000 (£10,000 divided by ten)

Now, let us assume he could have the following levels of gross income:

  • £10,000
  • £39,000
  • £50,000

 

Example 1. Income of £10,000

Income minus Personal Allowance = £4,775 taxable income

£4,775 + £1,000 slice = £5,775

Because the sum total of his income and the gain is below the basic rate threshold (£34,000 in the 2007/8 tax year), he has no further tax to pay. Because the underlying funds within Onshore Investment Bonds are taxed at source, a basic rate tax credit is given so that the policyholder is not double-taxed.

 

Example 2. Income of £39,000

Income minus Personal Allowance = £33,775 taxable income

£33,775 + £1,000 = £34,775

In this case, adding the gain to his income actually pushes him into the higher-rate tax band. However, this is solely due to the chargeable gain.

In this instance, ‘top-slicing’ can be applied to take into account the basic rate tax credit.

First, we calculate the tax on the gain without top-slicing relief.

 

£10,000 x 20% = £2,000

The number of relevant years for top-slicing purposes is 10, and the top-slice is £1,000.

Given that the individual has only £225 of basic-rate band left, the tax on one slice is

£225 x 0% = £0

£775 x 20% = £155

The tax on one slice is multiplied by the number of relevant years:

£155 x 10 = £1,550

The top-slicing relief in this instance has saved £450 in income tax (£2,000 - £1,550).

 

Example 3. Income of £50,000

In this case, top-slicing cannot help anyone who is already a higher rate taxpayer, and they will need to pay an additional 20% tax on the whole gain.

£10,000 x 20% = £2,000 income tax to be paid.

Using top slicing will give the exact result as above, as there is no basic-rate band left to offset.

£1,000 x 20% = £200 tax per slice.

As there are ten relevant years, multiply by ten to get the result of £2,000.

 

Offshore Bonds

 

Top Slicing Relief is still available when offshore bonds are surrendered. However, the important point to remember is that no tax credits are available due to the fact that the policy was issued in a low or no-tax environment.

It is important to remember that top slicing can only be used when the gain pushes an individual from the basic rate band into the higher rate band. It cannot be used if it pushes a nil-rate taxpayer into the lower-rate band or a lower-rate taxpayer into the basic-rate band.

When the proceeds are brought back into the UK, any gains are taxed at the policyholder’s highest marginal rate, including the starting rate band.

Using the same income examples as previously:

  • £10,000
  • £39,000
  • £50,000

Example 1. Income of £10,000

Income minus Personal Allowance = £4,775 taxable income

As the starting rate band is used, we work out the liability on the whole gain

£10,000 x 20% = £2,000

This is effectively the same as working out the tax per slice and multiplying by ten years

£1,000 slice x 20% = £200

£200 x 10 years = £2,000 tax liability

 

Example 2. Income of £39,000

Income minus Personal Allowance = £33,775 taxable income

£33,775 + £1,000 = £34,775

In this case, adding the gain to his income actually pushes him into the higher-rate tax band. However, this is solely due to the chargeable gain.

It is often easier to work out the additional tax liability by:

  • Working out the individuals tax liability without the top-slice
  • Working out the individuals tax liability with the top-slice
  • Subtract result 1 from result 2
  • Multiply the difference by the number of relevant year

 

Personal Allowance		£5,225 x 0% 	 = £0
Lower Rate Tax			£2,150 x 10%	 = £215
Basic Rate Tax			£26,400 x 22%	 = £5,808
Tax Due:  					           £6,023 income tax

If we work it out with the slice:

Personal Allowance		£5,225 x 0% 	 = £0
Lower Rate Tax			£2,150 x 10%	 = £215
Basic Rate Tax			£26,625 x 22%	 = £5,857.50
High Rate Tax			£775 x 40%	 = £310

Tax Due:						   £6,382.50 income tax

 

£6,382.50 - £6,023 = £362.50

Multiply this figure by 10 (years) = £3,625 tax due.

 

Example 3. Income of £50,000

In this case, just like the onshore bond, top slicing cannot help anyone who is already a higher rate taxpayer.

£10,000 x 40% = £4,000 income tax to be paid.

Using top slicing will give the exact result as above, as there is no basic-rate band left to offset.

£1,000 x 40% = £400 tax per slice.

Surrendering more than one bond in the same tax year

If you surrender more than one investment bond in the same tax year (or incur multiple chargeable events across different investment bonds), then the calculation is more complicated and beyond the scope of this article or this calculator.

An aggregate calculation needs to be undertaken, and you should take advice from your Accountant or Financial Adviser before doing this. If multiple surrenders are mistimed or miscalculated, the tax consequences could be substantial, yet potentially avoidable with a little careful planning.

Due to the limitations of this calculator, a completely new professional-grade Investment Bond calculator will be released in early 2008, and this will allow aggregate calculations, the ability to enter different values for different segments, as well as handling increments, partial surrenders, assignment, policy loans, corresponding deficiency relief, as well as analysis to work out the optimum way to take income from a portfolio of Investment Bonds.