I have a personal investment plan which I took out in 2004 with £14,000. It is now worth £26,760 and I have never made any withdrawals. The investment is made up of a mixture of gilts, fi xed interest, high income, and UK FTSE All Share. I want to transfer £15,000 into an Isa, but will I be subject to tax? I am retired and a basic-rate taxpayer.
Your personal investment plan is likely to be a life assurance policy such as an investment bond. Many of these were sold by banks, although the underlying investments may be managed by a life assurance company.
You won’t be able to transfer your investment into an Isa, although you could cash in part of your Personal Investment Plan and reinvest the proceeds into an Isa. The Isa annual allowance for this tax year is £20,000.
If it is a life assurance product, then any surrender you make could be liable to income tax. However, your fund will have been taxed internally and this is deemed to cover any basic rate income tax liability. So you will only have an additional tax liability if you are a higher-rate taxpayer or if the gain from your plan pushes you into the higher-rate tax band.
I don’t know exactly how your plan is set up, so the figures I am quoting below should be used as nothing more than a rough guide.
If you encash £15,000, this equates to about 56% of your bond value. When working out your gain, this corresponds to an initial investment of £7,840; being 56% of your original £14,000 investment. So you’ve made a gain of £7,160 on the proportion of your plan which you’re looking to encash.
This £7,160 gain is then divided over the 13 years you’ve held the plan to give you a gain per year of £550. The £550 gain is then added to your income in the tax year that you make the encashment. If this gain doesn’t push you into the higher-rate income tax band, then you will have no additional tax liability on the whole gain that you’ve made. If it does push you into the higher-rate tax band, then you will be liable to a tax charge of 20% on the proportion of your gain that falls into the higher rate tax band. Any tax liability is then proportioned over your total £7,160 gain.
The bottom line is that, with these numbers, if you’re not close to the higher-rate income tax threshold, then you should be able to make the encashment with no additional tax liability. If you are close, then you’ll need to work through the figures in more detail as you may be able to avoid a tax charge by making your encashment over more than one tax year.