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I paid £100,000 for a Step down policy in 2006. It is now

Resolved Question:

I paid £100,000 for a Step down policy in 2006. It is now worth £138,000. If I cash it in now do I pay income tax on all or part of it? Thanks
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

Can you tell me who the policy is with please. Was the money invested directly by you with the company behind it you buy the policy second hand? Is there any life assurance attached or is it purely an investment plan?

Customer: replied 2 years ago.

The policy is with AVIVA originally arrange for me by RBS.

Expert:  TonyTax replied 2 years ago.

Thanks.

Is there any life assurance element to the bond? Are you allowed to make withdrawals?Can you give me the exact name of the bond please.

Customer: replied 2 years ago.

The title is Portfolio Step Down Option. Withdrawals can be made subject to a limit of £100 on each occasion. As I have held the bond for over 6 years, there is no charge for withdrawals. The amount payable on death is any remaining amount plis 101% of the price of any units allocated to the policy.

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.

Hi again.

As far as I can see from looking at the Aviva information online, despite the unusual name, you have a single premium investment bond. So long as you don't withdraw more than 5% of the original investment in any one policy year, there are no immediate tax implications.

Assuming you have made no withdrawals since you acquired the bond, if you surrender it, you will have a chargeable event gain of £38,000. If you are a 40% taxpayer, ie your annual income excluding the gain is more than £41,450 you will have to pay income tax of £7,600 on the gain (£38,000 x (40% - 20%)).

If your annual income is £41,450 or less, then the gain of £38,000 will need to be divided by the number of complete policy years which have passed since it was acquired and the "top-slice" added to your income to determine if that takes it over £41,450. If it does, then the higher rate tax on that part of the top-slice which is above £41,450 (40% - 20%) will be multiplied by the number of complete policy years to determine the overall tax liability on the gain. If the top-slice does not take your income over £41,450 for the year, then you will have no further income tax to pay on the gain.

Take a look at the HMRC helpsheet HS320 for more information on life policy gains.

I hope this helps but let me know if you have nay further questions.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15753
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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