Where the total gains put the client into a higher tax band, basic into higher or higher into additional, top-slicing relief may be available. It‘s therefore important to understand the chargeable event rules where a client has more than one chargeable gain in any tax year.
First of all, calculate the top-sliced gain for each bond, then add the total top-sliced gains to the client’s income for the tax year and calculate the tax liability. Once the tax liability has been calculated it needs to be allocated pro rata across the bonds being surrendered.
Let’s look at an example:
Ben is surrendering three investment bonds and his earnings for the current tax year are £2,000 below the higher rate tax band. There are no other gains during the tax year.
Type of bond | Bond A UK | Bond B UK | Bond C International |
| Original investment | £100,000 | £70,000 | £250,000 |
| Withdrawals taken as 5 per cent each year | None | £35,000 | None |
| Surrender value | £120,000 | £75,000 | £270,000 |
| Gain | £20,000 | £40,000 | £20,000 |
| Years held | 5 years | 10 years | 4 years |
The tax payable under each bond is calculated as follows:
1.Calculate the top-sliced gain for each bond.
Bond A has a top-sliced gain of £20,000 ÷ 5 = £4,000.
Bond B has a top-sliced gain of £40,000 ÷ 10 = £4,000.
Bond C has a top-sliced gain of £20,000 ÷ 4 = £5,000.
2. Add the total top-sliced gains to the client’s income for the tax-year and calculate the tax liability.
The total top-sliced gain for the tax-year is £4,000 + £4,000 + £5,000 = £13,000.
The whole gain under the international bond is chargeable to 20% as there is no tax paid within the bond, therefore the liability is £20,000 x 20% = £4,000.
The UK bonds are already deemed to have paid basic rate tax.
For higher rate tax, £2,000 of the gain is covered by the remainder of the basic rate tax band. Therefore £11,000 of the top-sliced gain is chargeable at the higher rate of 20%.
Additional tax payable on the top slice is therefore £11,000 x 20% = £2,200.
3. Pro-rata the total tax liability across the different bonds being surrendered.
Total liability x (gain under bond ÷ total gains for tax-year) x number of years held.
Bond A: £2,200 x (£4,000 ÷ £13,000) x 5 = £3,385
Bond B: £2,200 x (£4,000 ÷ £13,000) x 10 = £6,769
Bond C: £2,200 x (£5,000 ÷ £13,000) x 4 = £3,385
In addition to the higher rate tax liability of £13,539, the international bond also has a basic rate tax liability of £4,000.
Ben has a tax liability of £17,539 against the chargeable gains. There will be an additional income tax liability if the policy gains before top-slicing when added to his income exceed £100,000 as his personal allowance will reduce accordingly.
In addition, his entitlement to the personal savings allowance will reduce to £500.
No. 4. Student loans and chargeable gains
Most children heading to higher education need to supplement their finances with a student loan. Where that child could also potentially benefit from an investment bond, consideration needs to be given to the exit strategy, if that occurs when the child is working.
