My wife and I have held a unit trust for 28 years. We have paid in around £25,000, with a profit of around £31,000 over the full term. On the original trust documents there is a statement that the holder will incur no liability for basic-rate income tax on the proceeds, nor a liability for capital gains tax (CGT).
When we cash the trust in, I was planning on any tax liability being subject to ‘top-slicing’ – this would be tax payable on a £560 ‘slice’, so not a huge amount. However, with the introduction of the personal savings allowance of £1,000 in April 2016, I’m concerned that HMRC will seek a tax liability on the full £31,000 profit. Am I correct?
I’m not sure what investment you hold but, based on your description, I don’t think you have a free-standing unit trust. The tax treatment you have described sounds like a life assurance policy, such as an investment bond. It is therefore possible that you hold a unit trust within an investment bond or similar wrapper. However, you need to check this.
With an investment bond, tax is paid internally and this cannot be reclaimed by the investor. This is taken into account, and so the returns to investors are considered to be net of basic-rate income tax, meaning that investors have no additional liability to basic-rate income tax. There is also no capital gains tax liability with an investment bond, as all gains are potentially subject to income tax.
Where investors can face an additional tax liability is if they are a higher-rate or additional-rate income taxpayer or if the gains from the bond push them into the higher or additional tax bands.
It’s important to note that as you hold the investment jointly with your wife, half of the gains will be deemed to be yours and half will be deemed to be hers and you will be taxed separately on your gains.
As an example of the calculation, let’s assume that you’re a higher-rate taxpayer and all of your £15,500 gains would remain in your higher tax bracket. Here you would pay 20% tax, this being the difference between the higher tax rate of 40% and the basic tax rate of 20%, which you are already deemed to have paid, meaning you face a tax bill of £3,100.
However, if you are a basic-rate or non-taxpayer then the gain is added to your income to work out if you need to pay tax. To determine this, the gain is top-sliced. So, a gain of £15,500 over 28 years is equivalent to a top-sliced gain of £553.57 each year. This amount of £553.57 is added to your income. If this doesn’t push you into the higher-rate tax bracket, then you will have no additional tax liability on the whole of your gain.
If some of your top-sliced gain falls into the basic rate tax band and some falls into higher-rate tax, then you will pay additional tax on the proportion of your top-sliced gain in the higher-rate tax band, but this proportion is then applied to your whole £15,500 gain to calculate your tax liability.
Also, gains on investment bonds are classified as ‘savings’ and so you may be able to use the Personal Savings Allowance to reduce or negate any tax liability.
If either you or your wife are facing a tax bill on the gains, there may be ways to mitigate this, such as surrendering the bond at a time when your other earnings are lower, surrendering the bond in parts over more than one tax year to spread out your gains, or assigning the whole bond to the lower earner of you or your wife before the bond is surrendered.