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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15940
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Assuming that your friend will have taxable income after personal

Resolved Question:

Assuming that your friend will have taxable income after personal allowance but before dealing with the proceeds of the bond of £30,000, explain, with calculations, how the policy proceeds will be treated for tax purposes
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi. Can you tell me what the level of your friend's income is before tax please. Has the bond been surrendered? If so, has a chargeable event certificate been received? If one has, what does it show as the chargeable event gain, the number of years and the tax treated as paid?
Customer: replied 1 year ago.
It said before the question;
"Your friends new business has been funded from the proceeds of a non-qualifying single-premium bond policy. The proceeds received were £102,000 and 4yrs ago your friend had withdrawn £3500 from the investment. His inital investment was £70000 & the policy ran for 7yrs".
Expert:  TonyTax replied 1 year ago.
Thanks. Leave this with me while I draft my answer.
Customer: replied 1 year ago.
Thanks :) , ive been trying to do it all day 'cos it's urgent
Expert:  TonyTax replied 1 year ago.
Thanks. Can you tell me exactly when the bond was surrendered and what your friend's income was in that tax year please.
Customer: replied 1 year ago.
It doesn't say what year it's in, it only states that his salary in his final yr of employment was £55,000
Expert:  TonyTax replied 1 year ago.
I'm assuming the bond was a UK bond and not an offshore one and that basic rate tax of £7,100 was treated as paid. The gain was £35,500 (£102,000 + £3,500 - £70,000). The number of relevant years was 7 so you divide the gain by that number to arrive at the top-slice of £5,071. Add £5,071 to the income of the tax year and if any part of that goes into the 40% tax band, further tax at 20% is due on that sum. Multiply the tax figure by 7 and you have the tax liability. The maximum it can be is £7,100. As your friend's income from employment was £55,000, he is already a 40% taxpayer so the gain of £35,500 is simply taxable at 40% less the 20% tax treated as paid. The tax liability is, therefore, £7,100. If he had trading losses in his first year, he may not have been a 40% taxpayer in which case the liability on the bond gain will be reduced. Take a look at HS320 for information on how chargeable event gains are taxed. If the bond was an offshore bond, no basic rate tax is treated as paid and the tax liability will be double. See HS321. I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thankyou, you're amazing :)
Customer: replied 1 year ago.
Just before I stop annoying you (i'm so sorry), but where did you get the £7100 from?
Expert:  TonyTax replied 1 year ago.
If the bond was a UK bond, the gain of £35,500 will be deemed to have suffered basic rate tax of £7,100 (20%). If your friend was a 40% taxpayer regardless of the gain, the extra tax due is £7,100, ie another 20%.
Customer: replied 1 year ago.
Just one more, you can block me if you want after this. Why did you say multiply the tax figure by 7?
You really have been amazing, put my mind at ease so i can sleep :)
Expert:  TonyTax replied 1 year ago.
In a case where the taxpayer is a basic rate taxpayer and not normally a higher rate taxpayer, a large gain from a bond may push them into the 40% tax band. So, you divide the gain by the number of years since the last chargeable event gain or since the policy started whichever is more recent and that top-slice is added to the other income of the taxpayer. If the taxpayer is still a basic rate taxpayer after the addition of the top-slice, then there is no tax to pay. If part of the slice is in the 40% tax band, the tax on that is multiplied by the number of years to arrive at the additional tax due. As your friend appears to have been a 40% taxpayer regardless, the gain is all taxable at 40%.
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