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TonyTax
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I invested £25k in a Halifax Guarantee plan, After 5 years

Resolved Question:

I invested £25k in a Halifax Guarantee plan, After 5 years the plan value had increased to£28330. Tn. Last year I withdrew £18k and have been informed there is a chargeable event of £10.000 on which I have to pay £2100 tax. Why do I have to pay tax on capital ?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

With this type of investment, you are allowed to withdraw 5% of the original investment tax free in each policy year. You can use the unused party of a 5% allowance in a later year if you wish so if in year one you withdrew 2% for example, in year two you would be able to withdraw 8%.

Any withdrawal in excess of the accumulated 5% allowances, £1,250 per policy year in your case, will be treated as a chargeable event gain or an advance payment of your profit on the policy and that is subject to income tax.

If the policy is a UK policy the gain will be treated as basic rate tax paid and you will only pay tax at the higher rate of tax, 40% or 45% less the 20% basic rate tax paid, if the top-slice of the gain (the gain divided by the number of complete policy years) takes your income above the threshold at which you start to pay higher rate tax. The tax figure shown on the certificate is not what you have to pay to HMRC. That is the tax treated as paid already. Top-slicing relief can help to reduce a higher rate tax liability but not if the policy owner is already a higher rate taxpayer.

If the policy is an offshore policy, there will be no basic rate tax credit and you will pay tax if you are a basic rate or higher rate tax payer. You will still be entitled to top-slicing relief if the top-slice of the gain takes you into the high rate tax bands.

Take a look at HS320 and here for UK policies and at HS321 and here for offshore polcies. Look here for some example calculations.

I hope this helps but le tme know if you have any further questions.
Customer: replied 2 years ago.

Thank you - no-one has previously explained that the tax demand is an advance payment. However does this mean that when I eventually cash in the policy £2333 will be deducted from any tax liability I have when I cash in the remaining amount

Expert:  TonyTax replied 2 years ago.

When you finally surrender the policy, the gain will be calculated as follows:

Surrender value + Previous withdrawals - Original investment - Previous Chargeable Event Gains = Gain (or Loss)

What that means is that on surrender, the overall gain is quantified for tax purposes. There will be a basic rate tax credit attached to that gain assuming the policy is a UK policy.

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