Tax on Withdrawals
Tax on Withdrawals
Basic rate tax is paid by the provider of the Capital Bond at a fund level dependent upon the income withdrawn from the investments within the fund. Therefore unless the policyholder is a higher rate taxpayer there is no further tax liability.
An additional higher rate tax liability may arise as the result of the following:
The bond being partially or completely encashed;
Withdrawals exceeding 5% and when added to other income this exceeds the threshold for basic rate tax;
Death of the person assured;
The policy is assigned to someone else.
Each policy year, the policyholder can withdraw up to 5% of the contributions made into your bond without having to pay income tax at the time of the withdrawal. The maximum amount that can be taken over the lifetime of a bond using the tax relief allowance must not exceed the total amount invested. Any unused allowance in a given tax year will be rolled over to successive years.
It is possible to withdraw more than 5% each year, or more than you have invested. This would cause a ‘chargeable event’ and the policyholder may then be liable for income tax. In this case the Provider will send the policyholder a ‘Chargeable Event Certificate’ which provides the information needed to complete a tax return (if necessary). Chargeable gains (those gains subject to tax) within the Bond are subject to income tax and not capital gains tax.
If a chargeable event is incurred any additional income taken above the 5% allowance will be subject to ‘top-slicing’. Given that the investment growth was achieved over a number of years it would be unfair for the amount withdrawn to be subject to tax in just one year.
The gain achieved is divided between the number of years the bond has been in force and added to their income for the tax year the chargeable event is occurred. If the additional tax liability were to fall within the individual’s basic rate tax band no further income tax would be payable.
Where part of the top-sliced gain falls into the basic rate band and part falls into the higher rate tax band, only the proportion that falls in the higher rate is taxable at the higher rate i.e. an additional 20% income tax payable.
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© 2023 A&J WEALTH MANAGEMENT LTD A&J Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register, no 428590, at www.fca.org.uk/register Registered in England, Company no: 5105933. Registered Head Office: Sawfords, Bigfrith Lane, Cookham Dean, Maidenhead, Berkshire SL6 9PH