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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15942
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I don't know whether to opt for 'block and spread' or

Resolved Question:

Hello, i don't know whether to opt for 'block and spread' or 'spread' when making partial withdrawal from investment bond re tax implications. Initial investment was 30k (not by me, gifted) and is now worth 41k. Took £25k last financial year and wish to take 5k now.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me exactly when the original investment ws made please. Was the bond gifted to you at the time of purchase? If not, do you know if there were any withdrawals from it prior to your ownership of it? You say that you took £25,000 last year? When exactly was that? Did that give rise to a chargeable event gain? What is the level of your anuual income currently?
Customer: replied 2 years ago.

Hello. The bond was transferred to me last financial year and was originally opened in 1997. No withdrawals have been made apart from the 25k so far. The actual date it was transferred to me was roughly two months ago. My annual income is 30k roughly. Sorry but I am unsure about what 'chargeable' event gain' meaning. Thanks for fast response.

Expert:  TonyTax replied 2 years ago.
Thanks.

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

OK thank you. If it makes difference, I have started a small business away from my main PAYE main full time employment. I don't imagine profit is even 1k but I could probably put it on my wife's tax return as her business if it made a difference. Your quick response and help appreciated.

Expert:  TonyTax replied 2 years ago.

Hi again.

With this type of investment, you are allowed to withdraw 5% of the original investment per policy year, hence why I asked for the exact date of investment. In any year where the 5% allowance is not fully used, the unused part can be used in a later year. You are allowed to withdraw £1,500 per policy year (£30,000 x 5%). If £2,500 had been withdrawn in year 1, there would have been a chargeable event gain of £1,000 (£2,500 - (£30,000 x 5% x 1)).

Assuming the policy is a UK policy, any chargeable event gain is treated as basic rate tax paid and there would only be tax to pay by you if you were a higher rate taxpayer in the tax year the chargeable event gain occurred. The gain would be divided by the number of complete policy years ("relevant years") which had passed since the last chargeable event and that fraction would be added to your other income to see if that took you into the higher rate tax bands. If it did, then the tax due on the part of the fraction which goes into the higher rate tax bands would be multiplied by the number of "relevant years", you would deduct the basic rate tax treated as paid on that fraction and that would give you your tax liability.

You withdrew £25,000 last year. Assuming that happened in policy year 17 and that there have been no earlier withdrawals, your accumulated unused allowance was £25,500 (£30,000 x 5% x 17). There would have been no chargeable event gain as you took out £500 less than the accumulated allowance of £25,500. If the withdrawal occurred in policy year 18, then your accumulated allowance would have been be £27,000 (£30,000 x 5% x 18) and there would have been no chargeable event gain.

You can read about blocking and spreading here and here. The idea is to reduce the potential chargeable event gain by surrendering one or more separate policies within the bond and partially surrendering the others.

If you take out £5,000 evenly across the board (spread), you will have withdrawn all the original investment before the 20 years of 5% allowances (£30,000) has been reached so there will be a gain of up to £3,000 depending on the exact date of the original investment. The gain is worked out on a completed policy year basis. If the event occurs in policy year 19, the gain will be £1,500 (£25,000 + £5,000 - (£30,000 x 5 % x 19)). You would divide the gain of £1,500 by the number of completed policy years (say 19) and the fraction of £79 (rounded up) would be added to your other income of £30,000. That will not take you into the 40% tax band and assuming the policy is a UK policy as opposed to an offshore policy, there would be no tax to pay as basic rate tax is treated as having been paid.

With offshore policies there is no basic rate tax credit so assuming you pay tax which you do, you would have a tax liability of 20% of the gain.

Given that until last year, there had been no previous withdrawals, there is little if anything to be gained by a block and spread strategy. Based on what you have told me, there will be no tax to pay unless the policy is an offshore one.

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

TonyTax and other Tax Specialists are ready to help you
Expert:  TonyTax replied 2 years ago.
Hi again.

It's been several days since I answered your question. Is there anything you need further clarification on?