Investment Bond

Chargeable gains, the starting rate band and the personal savings allowance

For the tax year 2017/18, there is a 0% personal savings allowance of up to £1,000 in addition to the £11,500 personal allowance and the £5,000 starting rate band.

So how will these 0% bands affect the taxation of chargeable event gains on international investment bonds, such gains being classed as savings income, and how will top-slicing relief come into play? The following illustrations (which all assume no other savings income apart from the chargeable gain) show the different scenarios that can arise and indicate how much of the chargeable gain will be assessed at what rate.

Client A has no non-savings income (broadly, this is earned income, pension income and rental income). This might be thought to apply to a limited number of scenarios, such as where someone other than a parent has created a bare trust for a non-earning beneficiary, for example. However, since the introduction of pension flexibility, this could be the case for many more clients than before, as taxable drawdown is regarded as pension income. Consequently, a client could arrange to have no drawdown benefit in a particular tax year and substitute it with proceeds from the encashment of an international investment bond, for example. The total chargeable gain triggered by A does not exceed £16,500, so no tax is payable.

Client B has a small amount of non-savings income but, as the total of the chargeable gain plus the
non-savings income does not exceed £16,500,
no tax is payable.

Client C also has a small amount of non-savings income but the total of the chargeable gain plus the non-savings income does exceed £16,500 by up to £1,000. As a result, the amount of the gain that is pushed over the basic rate band will not suffer any tax liability, as it will fall within the £1,000 personal savings allowance.

Client D’s non-savings income exceeds the personal allowance, which means that part of it will be taxed at 20%. If D triggers a chargeable gain and the total of the chargeable gain plus the non-savings income does not exceed £17,500, there would be no tax to pay on the gain. However, where the total exceeds £17,500, as shown in the above diagram, part of the gain will also be assessed at 20%.

Client E is a basic rate taxpayer, both before and after the chargeable gain has been added to the non-savings income. In this situation, £1,000 of the gain will be taxed at 0% and the remainder will be taxed at 20%.

So far, no consideration has been given to top-slicing relief. The reason for this is that top-slicing will not apply in any of the situations considered for clients A to E. This relief will be relevant only where the total gain straddles the higher rate threshold (or the additional rate threshold, not considered here). Client F is in this position so, although some of the gain will be able to take advantage of the 0% personal savings allowance, this will be reduced to £500 as F is a higher rate taxpayer. The remaining gain will be assessed, some at 20% and some at 40%, but the 40% liability could be reduced by up
to 20% by the application of top-slicing relief.
Note, however, that top-slicing relief will not reinstate the £500 personal savings allowance to £1,000, even if the effect of top-slicing relief would eliminate the 40% liability.

One further situation (not illustrated above) needs to be considered. Client G has an investment bond that, on encashment, would trigger a chargeable gain in excess of £45,000. G is already a higher rate taxpayer, so all of the gain (apart from the first £500, which could utilise the 0% personal savings allowance) would be assessed at 40% – some could even be assessed at 45%, in which case the personal savings allowance would be lost as this is not available to additional rate taxpayers..

If the bond is assigned to G’s spouse, H, who has no income at all, what would be the position where H subsequently encashed the bond? As H has no other income, the first 17,500 (£17,000 + £500) of the gain would suffer no tax at all. The next £27,500 (the difference between £45,000 and £17,500) would be assessed at 20% and the remainder would be taxed at 40%. Top-slicing relief could reduce this 40% liability by up to 20% but it cannot be used to take further advantage of the personal allowance, the starting rate band or the personal savings allowance.

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