How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask TonyTax Your Own Question
TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
13905389
Type Your Tax Question Here...
TonyTax is online now

A Prudential Insurance Investment Bond was purchased in

Resolved Question:

A Prudential Insurance Investment Bond was purchased in October 1993 in my wife’s name at a cost of £55,000 and £2,000 was withdrawn per annum , in quarterly instalmentsover a period of 21 years. The Bond was encashed in May 2015 for the sum of £119, 105.92 The total amount received in quarterly withdrawals during this 21 year period was £43,000.
In the tax year 2015 my wife received other income from a rented property and pension amounting to £31,101. Prudential have issued a Chargeable Gain Certificate amounting to £110,721.93 based on the above figures but stating that withdrawals amount to £46,616.01 which I am disputing since we have received only £43,000.
HMRC have produced a tax calculation stating that the total tax due but this figure includes the Bond withdrawals received over the past 21 years and which I am also disputing.
My own top slicing encashment provided that the £10,600 personal allowance is allowed and that the only tax due is £4,059 which is in respect of the rent income and pensions.
Can you please help and advise.
Submitted: 1 month ago.
Category: Tax
Expert:  TonyTax replied 1 month 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 1 month ago.

Can you tell me what number is ***** on the chargeable event certificate next to "Relevant Years" or "Number of years since last chargeable event or policy inception".

Customer: replied 1 month ago.
There is no mention of the number of years or relevant years on the "Full Surrender Statement" issued to us by Prudential. As the policy was commenced on 11.10.93 and was terminated on 19.5.15, I have always assumed that it was 21 years or possibly 22 financial years.
Expert:  TonyTax replied 1 month ago.

Thanks.

Leave this with me while I draft my answer.

Expert:  TonyTax replied 1 month ago.

The chargeable event gain certificate should show the number of relevant years.

Assuming that your wife never withdrew more than 5% of the original invesment in any one policy year, there would have been no chargeabkle event gains until the final encashment. Therefore, the number of relevant years is 21.

The cash taken out over the life of the bond has to be taken into account at the final reckoning so as to arrive at the actual gain made since inception. Had you not withdrawn any cash until the final encashment, the final value would have been much greater. Your wife invested £55,000 and took out £162,105.92 (£55,000.00 + £119,105.92). The gain is, therefore, £107,105.92 (£162,105.92 - £55,000.00).

The chargeable event gain should be divided by the number of relevant years as shown on the certificate. That gives you £5,100 (£107,105.92 / 21). Add £5,100 to your wife's income for 2015/16 and you get £36,201 (£5,100 + £31,101). As £36,201 is less than £41,785, the point at which the sum of the personal allowance and the basic rate tax threshold ends, there can be no tax to pay on the gain unless it was an offshore bond which is deemed not to have suffered basic rate tax at source on gains arising from it. UK bond gains are treated as basic rate tax paid.

Assuming that your wife completed a tax return for 2015/16, if HMRC are asking for a tax payment on the gain, either the gain was disclosed incorrectly in the return or its an offshore bond gain in which case there will be a tax liability on it.

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

Customer: replied 1 month ago.
Thanks Tony for this. What you say is exactly the conclusion which I came to. But what has happened is that HMRC have added the £107,000 gain to her other income and then claimed that she is over the £100,000 income threshold which apparently cancels out her normal personal allowance of £10,600 thereby putting her into the 40% tax category. My question therefore is whether this is valid or not bearing in mind that the withdrawals which were paid out over 21 years were not received in the year 2015/16, PS please do not try to text the phone number I gave you as this is a land line. For any future texts please use***********
Expert:  TonyTax replied 1 month ago.

How much tax are HMRC saying is payable?

Expert:  TonyTax replied 1 month ago.

It is correct that the whole of the gain is taken into account when determining entitlement to the personal allowance or not.

Customer: replied 1 month ago.
The total tax calculated by HMRC is £25,491. I should perhaps explain that we did submit a self assessment for the year 2015/16 previously but did not declare this Prudential Encashment since the calculation I carried out indicated no additional tax due and in due course we paid £4,059 for the tax on her declared income of £31,100. It was only in September that HMRC appeared to hear of this Bond encashment and hence have submitted a calculation and request for the balance which is £21,391
Expert:  TonyTax replied 1 month ago.

Prudential would have informed HMRC of the chargeable event gain though it should have been disclosed in the tax return. In most cases, the gain won't be so large as to lead to the loss of the personal allowance but in your wife's case it is. My initial calculation was incorrect so I apologise for that. Yourt wife's income was £36,101 with £31,785 being taxed at 20% and £4,316 being taxed at 20%. The additional tax on the gain is £18,127.20 (£4,316 x (40%-20%) x 21)).

TonyTax and other Tax Specialists are ready to help you
Customer: replied 1 month ago.
This is bad news but thanks for your patience and advice - I guess I will just have to grin and bear it and cough up!!Kind regards NS
Expert:  TonyTax replied 1 month ago.

Take a look at the FAQ's here which confim the bad news.

Expert:  TonyTax replied 1 month ago.

Thanks for accepting my answer.