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TonyTax
TonyTax, Tax Consultant
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I have a with Profits fund with Prudential. I have held it

Resolved Question:

I have a with Profits fund with Prudential. I have held it for 16 years. If I cash it in am I looking at CGT or some kind of income tax charge based on the profits and the number of years held?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

Can you tell me why the plan was taken out originally? Was it in connection with a mortgage or was it just a straight savings policy? Have you maintained monthly premium payments or was it a single premium policy? If it was a single premium policy have you made any withdrawals from it? What was the intended term of the plan?
Customer: replied 3 years ago.

I took the plan out as a savings plan and made one payment of £10,450 16 years ago. It is a bond that is separate to any mortgage or anything else. I have not made any of my 5% per annum withdrawals and made no further investments either. I was trying to decide whether to take my 5% deferred payments for the 16 years as a partial withdrawal or en cash the whole policy. I am currently just in the higher tax rate band so didn't want to create an additional tax charge. Originally I thought I could use my CGT allowance but then it seems it is Income tax and something to do with 'core top slice' but I am not sure how that works.


 


Thanks


Debbie

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 3 years ago.
Hi again.

As you know, you can take 5% of the original investment out per policy year and if you don't use part of all it, you can roll it up to use later. As you have not made any withdrawals you could take 5% of the original investment out for each completed policy year and have no immediate tax concerns. However, when the policy is finally ended, the sums withdrawn will be taken into account in calculating any chargeable event gain.

If you cash in the plan completely, you will have a chargeable event gain if the proceeds are more than £10,450. That will have arisen over 16 years so you would divide that by 16 to arrive at the top-slice. The top-slice will be added to your other income to determine your top tax rate. One of the following will apply to you:

1 If you are a 40% taxpayer before the top-slice of the gain is added, you will pay 20% tax on the whole gain (40% - 20% basic rate treated as paid assuming the policy is a UK policy).

2 If you are a 40% taxpayer only if the top-slice of the gain is added to your income, you will pay 20% tax on that part of the top-slice which goes into the 40% tax band (40% - 20% basic rate treated as paid assuming the policy is a UK policy). The 20% tax on the part of the top-slice which goes into the 40% tax band will then be multiplied by 16 to arrive at the overall tax liability on the gain.

3 If you are a 20% taxpayer after the top-slice of the gain is added to your income, then you will have no further tax to pay assuming the policy is a UK policy.

Take a look at the HMRC helpsheet HS320 here for more information.

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.


Thanks, XXXXX XXXXX I am better waiting until I go back to being a normal rate tax payer. Kind regards

Expert:  TonyTax replied 3 years ago.
Thanks.
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