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TonyTax
TonyTax, Tax Consultant
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My wife and I invested £7128.10 in Axa(now Friends Provident)

Customer Question

My wife and I invested £7128.10 in Axa(now Friends Provident) Deferred Distribution Fund
Bonds in August 1992. In 2002 we decided to take an income of £49.98 per month, and
we are still taking it. According to my calculations we shall use up the full original
investment monies in a couple of months time. My wife is a non taxpayer and I am a basic
rate taxpayer, and, as it would appear that the 5% per year free of tax allowance has been
breached,will we be liable for any income tax. Also if we continue with the £49.98 per
month until we, perhaps, decide to cash in this investment (now worth £21,280.41) what
will the tax position be then. Incidentally, my income including my private and old age
pensions, are nowhere near the 40% band. Many thanks if you can advise me.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

Is the policy a UK or an offshore policy? Have you ever exceeded the accumulated 5% annual withdrawal limit?

Customer: replied 2 years ago.

The policy is a UK policy and as I took no income from


the policy for the first ten years I understood that the


unused portion of the 5% allowance could be added


to the following years until the tax free allowance was


used up.

Expert:  TonyTax replied 2 years ago.
Thanks.

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

If it's any help my annual income this financial year


is approx. £21,300 and my wife's approx.£8,500.

Expert:  TonyTax replied 2 years ago.

Hi again.

You can roll up the unused 5% annual allowances.

As the policy is a UK policy, any chargeable event gain is treated as basic rate tax paid so you would only have further tax to pay if the gain or the top-slice of the gain took you into the 40% or higher tax bands.

From the point that you have effectively withdrawn all your original investment, any withdrawals are treated as chargeable event gains. So, if you withdraw £600 in a year, that will be a gain which is deemed to have suffered tax of £120 and it will be split between you and your wife, £300 each.

You divide the gain by the number of years since the last chargeable event to arrive at the top-slice. As you have had no previous chargeable events, you will dividing the gain by a number over 20 for the first one and by one each year thereafter. Add the top-slice to your income to see if that takes you into the 40% tax band. I doubt it will from what you told me. If it does, then the tax will be 20% of the amount of the top-slice that takes you into the 40% tax band multiplied by the number of years since the last chargeable event.

When you finally cash in the policy, the gain will be calculated by taking the proceeds, adding the previous payments and deducting from the result of that calculation the original investment amount and the previous chargeable event gains. Take at look at the examples here.

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

Customer: replied 2 years ago.

Thank you for your answer. According to the Pru's


notes a chargeable event gain on UK bonds is not


liable to basic rate tax. The individual or individuals


who are liable for the tax under the chargeable event


regime are treated as having paid tax at the basic rate


on the amount of the gain,notional tax not repayable.


That surely applies to my wife and myself,does it not?

Expert:  TonyTax replied 2 years ago.

It does apply to you and your wife and that is what I said in my answer. This is taken from my answer:

"As the policy is a UK policy, any chargeable event gain is treated as basic rate tax paid so you would only have further tax to pay if the gain or the top-slice of the gain took you into the 40% or higher tax bands."

I have highlighted the words "only" and "if" in this post. I explained how it all works so you would know how to check and confirm that you had no tax to pay as opposed to making an assumption that you had none to pay.

Expert:  TonyTax replied 2 years ago.
I have to go out for a while but I will be back to answer any further questions you may have.

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