Investors in life assurance bonds (investment bonds) such as the one you own are potentially liable to income tax on any gains they make. However, these products already pay tax on income and capital gains within their fund, which is deemed to be the equivalent of you having paid income tax at the basic rate already.
Therefore you won't have any additional tax to pay unless you have a liability to income tax above the basic rate and a 'chargeable event' occurs. A chargeable event occurs when the bond is surrendered or part-surrendered, assigned to someone else, withdrawals in excess of 5% a year cumulative are taken, or on the death of the last remaining life assured.
If you cash in your bond, this will be treated as a chargeable event and so you need to work out whether you will have an additional income tax liability.
This is done by adding the gain you've made, including any withdrawals that have been taken, to your income for that tax year to see if it pushes you into the higher-rate, or additional-rate, income tax band.
However, this would be unfair to those who have held their bond for a long time, as they are likely to have made bigger gains, and so to determine any tax liability, the gain is divided by the number of years the bond has been held, called 'top slicing'.
You've made a gain of £37,487.75 on your bond over a period of 20 years and so the top sliced gain is £1,874.39 each year. However, as you hold the bond jointly with your wife you are deemed to own half the investment each and so you've both made a top-sliced gain of £937.19.
This amount of £937.19 is added to your income, and to your wife's income, in the tax year you cash it in and as long as this doesn't push either of you into the higher rate tax band you'll have no further income tax to pay.
If it did, you would be liable for tax at 20%, the difference between basic- and higher-rate income tax, and this would be based upon the proportion of your gain in the higher-rate tax band and on the whole gain you've made, not just the top-sliced gain.
However, you should be aware that encashing an investment bond can also result in the reduction or loss of any additional age-related personal income tax allowance from which you benefit.
Finally, if you pass the proceeds to your children this will be treated as a Potentially Exempt Transfer (PET), so this money wouldn't be fully out of your estate for inheritance tax purposes for at least seven years.