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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15979
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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What costs would I have if I cashed a unit bond valued currently

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What costs would I have if I cashed a unit bond valued currently circa £45000, whilst earning a similar figure

Can you tell me a little about the bond please. When did you invest in the bond? What was the value of the investment? Does it have life cover attached? Are you able to withdraw 5% of the original investment tax free in each policy year? Have you made any withdrawals which have given rise to a chargeable event? Have you made any withdrawals at all?
Customer: replied 3 years ago.
Hi, it's with friends prov, I invested £35K March 09, kept the plan untouched for at least 5 years. I have withdrawn £7k last year, there is I believe life cover and yes I understand I can withdraw 5%. My earnings ar around £46k,and I want to know best option, withdraw all and utilise what I need of take just what I need and leave the rest where I is. £16k would keep me going if that is the best option


Given the type of policy it is, can you confirm that it is a UK bond as opposed to an offshore bond? When exactly did you withdraw £7,000?

Customer: replied 3 years ago.
It is UK bond, withdrew £1750, June 2012 and £7k aprox July 2014

Leave this with me while I draft my answer.
Customer: replied 3 years ago.

Hi again.

Take a look here for information on chargeable event gains.

You can take 5% of your original investment out in any one policy year tax free. Any part of an unused 5% allowance that isn't used can be taken in a later policy year. As you have taken £8,750 by the end of policy year 6 in March 2015, you are £1,750 below your accumulated allowance of £10,500.

If you cashed in the bond completely now in policy year 7, you would make a gain of £18,750 (£45,000 + £8,750 - £35,000). That will have accrued over 6 complete policy years, ie £3,125 per policy year. However, you wouldn't benefit from top slicing relief as you appear to be a 40% taxpayer.

As you appear to be a 40% taxpayer with earnings over £42,385, a chargeable event gain of £18,750 would be taxed at 40% (£7,500) with credit being given for the basic rate tax treated as paid (£3,750) so you would be left with a net income tax liability of £3,750.

If you took £16,000 out now, there would be a chargeable event gain of £12,500 on which you would pay income tax of £2,500 (£16,000 - (£35,000 x 5% x 7 - £8,750) x (40% - 20%).

In order to leave you with £16,000 net of tax, you would need to be looking to withdraw around £19,200 which would leave you with a gain of £15,700 (£19,200 - (£35,000 x 5% x 7 -£8,750) on which you would pay income tax of £3,140 to leave you with £16,060.

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

Customer: replied 3 years ago.
Thanks for your advice, can I confirm your explanation suggests, taking all of my fund would be financially better than withdrawing a proportion?
It probably would. The reason for that is that you get the benefit of the cost of the entire investment with a total surrender whereas if you take a partial surrender, you only get to use part of the cost and anything you take in excess of that is treated as 100% gain.
Customer: replied 3 years ago.
How do I pay the additional tax?, is it automatically through my earnings?, is it deducted at the cash in or ???
If you incur a chargeable event, you will be sent a certificate. HMRC will be advised too. You would either disclose the gain in your self-assessment tax return or, as it is a one off, contact HMRC and ask them to assess the tax outside of the self-assessment system.

The gain may have an impact on your entitlement to child benefit if you have children. Check that here.

Of course, you would need to consider the potential future performance of the bond before you decide what to do with it.
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