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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My wife part-cashed in a Prudential Investment Bond which

Customer Question

My wife part-cashed in a Prudential Investment Bond which was £50k. The premiums she paid since it started totalled£38,400. After she had received the money she received a letter from Prudential stating there was a tax liability on this event. The letter contained a Chargeable Event Certificate but I don't understand the figures. The withdrawal and the premiums paid are as above but then it states the 'chargeable gain amount' is £33,680.00 and the notional tax is £6736. Does that mean she is liable to pay £6736 in income tax when it she only gained £11,600 (£50,000 minus £38,400). Where did the £33,680 come from in their calculations?
Submitted: 11 months ago.
Category: Tax
Expert:  TonyTax replied 11 months ago.

Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

Expert:  TonyTax replied 11 months ago.

What is the number of relevant years show on the certificate? Did your wife withdraw cash from the bond between the original investment date and when it was cashed in?

Customer: replied 11 months ago.
Hi Tony,
It shows 16 years. She invested the money on a regular monthly basis since the start at a rate of £200pm initially for the first few years dropping to £100 per month more recently and up to the point it was cashed in. Does this help?
Expert:  TonyTax replied 11 months ago.

It does. I'll get back to you this morning.

Expert:  TonyTax replied 11 months ago.

Hi again.

Can you tell me what your wife's annual pre-tax income was for the tax year in which the bond was surrendered please. How much of the bond in percentage terms was cashed in? What was the start date of the bond? How many years did your wife make £200 per month contributions before they were reduced to £100 per month?

Customer: replied 11 months ago.
Hi Tony,Will have to get back to you on some of these questions. However I can advise you that my wife's income would have been in the region of £75k per annum and the bond was almost totally cashed in with just a residual amount of about £3k left in. I will come back to you on the other points later.Thanks.
Expert:  TonyTax replied 11 months ago.

OK.

Customer: replied 11 months ago.
Hi Tony,
In answer to you questions:
Pre tax Income for 2015/16 was £69544
We can't recall the exact percentage that we cashed in but there was only a small residual left it the bond. So it was about 98% cashed in. Note, that the bond is still running and my wife has continued to invest £200 per month since it was cashed in November 2015. The start date of the bond was 1/12/1999.
Please note that me previous message stated that she invested £200 to start with then dropped to £100. This was inaccurate. She has always invested £200 per month since its inception.Look forward to your reply.Regards,
Expert:  TonyTax replied 11 months ago.

Your wife is clearly a 40% taxpayer so she will have a tax liability on the chargeable event gain (wahtever that is) of 20% of the gain (40% - 20% tax treated as paid as show on the certificate).

You might take a look at the notes under "Qualifying policies" here. On a full surrender, the gain would normally be calculated by taking the intial premiulm, adding in any additional premiums paid and deducting the total from the sum of the surrender proceeds and previous cash withdrawals. Without a copy of Prudential's calculations I'm at a loss to understand how the gain of £33,680 was arrived at if the surrender proceeds were £50,000.

Normally, chargeable event gains don't occur on continuous premium payment bonds, just on single premium bonds so that is another oddity. However, the notes do give details of the circumstances when a chargeable event gain can arise on monthly contribution bonds. If I were you, I'd contact Prudential and ask them to send you a copy of their calculation of the gain or to explain it over the phone while you take notes. I'd be happy to take a look if you upload it to me using the paperclip tool and after having blanked out your wife's name, address and bond number on any.

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

Customer: replied 11 months ago.
Tony,
I thought the attached may assist. This is what we received from the Prudential.
Expert:  TonyTax replied 11 months ago.

I'm afraid it doesn't. I would need to see the Prudential calculations. As you say in your initial question, £38,400 has been invested, £50,000 has been withdrawn and very little is lef in the bond.

In a single premium case, the gain would be calculated by taking the surrender proceeds and deducting the single premium. That's easy. you are also allowed to take out 5% of the original investment per policy year tax free and any such withdrawals are taken into account at the end in computing the gain. The notes here tell you how the tax works.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 11 months ago.
Thanks Tony. I appreciate all you input. I have spoken to Prudential today who will send me their calculations. The person I spoke to on the phone could not really comment on whether its right or wrong but he has also lodged a complaint on out behalf as he felt the information originally provided by them was insufficient and lacked clarity. We shall se. what happens...
Expert:  TonyTax replied 11 months ago.

I would also ask Prudential why the policy is a non-qualifying. I'd be happy to look at the calculations when you receive them.

Customer: replied 11 months ago.
Thanks Tony. I may well do that. They did say that they would answer before 12th October so I guess that means it wont be instant!
Expert:  TonyTax replied 11 months ago.

OK.