UK IB Flashcards
Define what an investment bond is
An investment bond is a single premium, non-qualifying, unit-linked, life assurance contract.
What is the purpose of an investment bond?
- Medium to long term investment
- Offers potential for capital growth
- Flexible income options - Partial enchashment of units (contracts)
- Tax planning oppurtunties - tax deferment (5% each full policy year - return as capital).
- Tax planning oppurtunies - IHT mitigation by placing bond in trust (Loan trust)
What is the structure of an investment bond? SJP specific information?
- Investment bonds are segmented; comprising of many different individual units.
- SJP UK investment bonds allows up to 1,000 contracts.
- Greater contracts allows for greater flexibility in enchashment - contacts share the same investment mix but can be surrendered or assigned individually.
Taxation of investment bonds
Investment grows free of tax whilst in the bond
income tax
* The life office suffers basic rate tax - income tax liablity is limited to higher and additional rate taxpayers at the difference (20%, 25%).
Top Slicing relief
* No tax is paid until chargeable event.
* Allows for a representative average gain over the years the policy is in affect
* The relief is based on the difference between tax on the full gain and the tax on the ‘average’ (sliced) gain over the policy’s term.
CGT
* No CGT due, instead, taxed as income.
Entitlements, allowance, and tax reliefs
The full gain (rather than the top sliced gain) is always used when determing and individual’s eligibilty for the:
- Personal allowance
- Personal savings allowance
- Starting rate for savings
The impact of chargeable event gains on the personal allowance?
The personal allowance is reduced by £1 for every £2 where an individual’s adjusted
net income is in excess of £100,000.
For these purposes the whole of the chargeable event gain has to be added to the individual’s other income to determine the position.
Chargeable event gains - Explain, and what are 5 chargeable events?
When a chargeable event results in a gain, Income Tax may be payable.
- Partial enchasments in excess of the 5% culmulative allowance
- Full surrender of one or more clusters or the whole investment bond
- Death of the last remaining life assured
- Fully or partly assigning the investment bond for money or money’s worth (selling or transfering in consideration of benefit or other form of payment).
- Adding or changing a life assured.
Death and multiple lives assured
So long as their is one life assured still surviving, the investment bond will continue to be in force.
* Death of the IB owner does not necessarily mean the bond ends, unless they are also the only life assured.
* Adding additional lives can create tax planning opportunities multiple lives on the policy ensures that the death of one does not create a chargeable event.
* Lives assured do not have ownership rights
Who has ownership rights of an Investment bond?
The owner only. The lives assured do not have ownership rights.
When is the chargeable event gain treated as taking place? For full and partial encashment about 5%?
Full Encashment: Gain arises on the date of encashment and is taxed in the tax year it occurs.
Partial Encashment (above 5% allowance): Gain arises on the last day of the plan year and is taxed in the tax year of the plan anniversary.
Chargeable Event Gain on Partial Encashment
- Gain arises on last day of the plan year (tax planning)
- Up to 5% of the original investment can be withdrawn on a tax-deferred basis each policy year. Unused amount is cumulative and carried forward.
- Withdrawals within the 5% allowance are not immediately taxable or reportable but are considered upon bond termination.
- Ongoing advice charges - reduce the the available 5% allowance (typically advised as 4%)
- Will be charged at 20% or 25% (basic rate satisfied)
Taxation of excessess - top slicing, and how to calculate.
Top-slicing is not beneficial where when the slice is added to the individual’s other income, results in a basic rate tax liability.
* Top-slicing is not available to trustees.
- Divide the excess by the number of years the contact has been running where an initial excess event occurs or by the number of years since the last chargeable event if applicable.
- Add to the individual’s total taxable income for that tax year in which chargeable gain arises
- If under the higher rate Income Tax threshold, no further tax is due
Top slicing relief: how relief is given - One event.
-
Determine Tax Bands:
Calculate total taxable income for the year and allocate the gain across tax bands (starting rate for savings, personal savings allowance, basic, higher, or additional rate). Ignore Gift Aid payments. -
Calculate Total Tax:
Compute tax due on the gain across all tax bands and deduct basic rate tax already paid. -
Find Annual Equivalent:
Divide the gain by N (the number of complete years the policy was held). -
Calculate Relieved Liability:
Compute tax on the annual equivalent, adjusting allowances (e.g., personal and savings allowance) as required. Deduct basic rate tax on the annual equivalent and multiply by N to determine relieved liability. -
Apply Relief:
Subtract relieved liability from total tax due to calculate the final tax liability.
Top slicing relief: how relief is given - Two or more chargeable events
In this case, the total gains are added together. The ‘annual equivalent’ is calculated separately for each gain, and then these annual equivalents are added together.
Chargeable event gain on final encashment calculation
[Amount paid out + all partial encashments] minus [original investment + all excesses]
Example:
Mr Jones invested £100,000 in an investment bond. Three years later he withdrew £20,000. He surrendered the bond eight years later when it was worth £145,000.
Chargeable event gain:
[£145,000 + £20,000] less [£100,000 + £5,000] = £60,000
From the perspective of income tax, what is the best route to enchash units?
Partially encash each individual contract.
A comparison exercise should be undertaken before making the decision of how to withdraw money from an investment bond.
When a full encashment of some of the individual contracts in an investment bond is made, this will reduce the 5% allowance available in the future because there will be fewer individual contracts remaining in the investment bond.
For onshore investment bonds where an on-going advice fee is being paid, this will reduce the 5% cumulative allowance available to clients wishing to make withdrawals. Please refer to The Advice Framework for further details.
What is Time apportionment Relief? (TAR)
Time Apportionment Relief (TAR) reduces the taxable chargeable event gain on investment bonds for periods when the policyholder was non-UK resident. Only the portion of the gain corresponding to UK residency is taxable.
This can also restrict top-slicing relief.
TAR eligibility and calculation depend on the bond’s start date and the individual’s residency status, with either pre- or post-April 2013 rules applying based on the bond’s terms
General Notes:
* TAR reduces taxable gains proportionally for time spent as a non-UK resident.
* Applies to both onshore and offshore investment bonds.
Additional investments into bonds benefit from TAR if made under bond terms.
* Assignments between spouses allow TAR to account for both individuals’ non-UK residency.
Name advantgaes of Investment bonds
9 points
- 5% cumulative tax deferred withdrawal facility – no immediate liability for Income Tax.
- No Capital Gains Tax on encashment
- Individual contracts provide flexibility
- Pooled investment gives access to a large range of funds
- Easy to put into trust and simple administration
- The owner and life assured can be different people, and also by including younger lives assured it is possible to defer final encashment
- No further Income Tax liability for a basic rate taxpayer
- Top-slicing relief may be available to reduce higher or additional rate Income Tax liabilities.
- Possible to assign individual contracts to a basic rate taxpayer prior to encashment, therefore, avoiding an Income Tax liability (if over 18).
Name disadvantgaes of Investment bonds
- Non-taxpayers cannot reclaim tax paid within the fund
- Tax assessment on a chargeable event may cause higher or additional rate Income Tax liabilities.
Who are suitable client for investment bonds?
- All ranges of taxpayers (non can’t reclaim).
- Clients wanting an ‘income’ from their investments can use the 5% tax deferral withdrawal facility for up to 20 years with no immediate liability to Income Tax, longer if less than 5% is taken.
- Clients wishing to make a gift into a trust
- Clients wanting flexibility of encashment
- An ideal investment for many Inheritance Tax planning schemes
How does top-slicing relief for final encashment differ from top-slicing relief for partial encashment excesses?
For final encashment the gain is divided by the number of fully completed years the investment bond has been running (rounding down).
For partial encashment the gain is divided by the number of partially completed years (rounding up) back to the last chargeable event, or inception if this is the first chargeable event.
