Part surrenders of up to 5% of accumulated premiums can be taken without any immediate tax charge. Any allowance not used can be carried forward to subsequent years. An investor can therefore withdraw 5% of a single premium investment each year for 20 years without a chargeable event occuring.
For example, a single premium of £100,000 was paid in on 1 January 2012. In the year ending 31 December 2013, there was a part surrender of £9,000. A calculation is performed that shows that the proceeds of £9,000 are less than cumulative allowances of £10,000 (£5,000 + £5,000) and so no tax is payable.
Large part surrenders can create unintended adverse tax consequences and it may therefore be more beneficial for an investor to fully surrender individual segments or policies within the bond than take a partial surrender across all the segments.
This is possible because an investment bond is typically divided up equally between a number of identical but distinct and self-contained policies.
Chargeable event gains on UK bonds are not liable to basic-rate tax. The individual who is liable for tax under the chargeable event regime is treated as having paid tax at the basic rate on the amount of the gain.
If you are a basic-rate taxpayer, then any gains are free of tax. Higher- and additional-rate taxpayers will be taxed at 20% and 25% respectively and may be able to reduce this gain with top slicing relief.
Withdrawals are tax deferred and are chargeable applying the rate of tax at the date of charge.This can be used to good effect if you are currently higher- rate taxpayers but expect to be basic-rate taxpayers when the deferred charge crystallises and so the gain is put off to a tax year when there is no liability to tax.
An assignment by way of gift does not trigger a chargeable event and any subsequent chargeable events are assessed on the new owner.
This is beneficial where one of you is a basic-rate taxpayer and the other a higher- or additional-rate taxpayer. Thus you could transfer the bond to the spouse with the lower rate of tax and reduce your overall tax bill.
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy