Case Study: Offshore Bond

Offshore Bond and use of personal allowances

We came across an unusual case recently, which involved a bit of head scratching, and so we thought we’d share it with you here as a case study, in case you come across a similar scenario with any of your clients….

The case involved a client potentially surrendering an offshore bond with a significantly large gain whilst the client is a nil rate taxpayer. For various reasons, the aim was to surrender the bond in full, in our analysis focused on the tax implications of this.

Scenario:

Client has state pension income of £6,000 per annum and bank account interest income of £1,000 per annum. She has an offshore bond set up just over 7 years ago which she has withdrawn from at times, but always keeping within the 5% annual allowance.

The original investment was £210,600 and after total withdrawals of £73,710 the value of the bond to surrender is £211,255.

Husband is a higher rate taxpayer and so there is no one better positioned to potentially assign the bond to prior to surrender.

We found it extremely difficult to find examples of someone with such low income, but such a potentially huge gain. The process we followed was:

First the gain is calculated as normal:

Current Value: £211,255

Total Withdrawals: £73,710 (no excess)

Adjusted Value: £284,965

Original Investment Amount: £210,600

Gain: £74,365

The next step was to take this gain and reduce it by any available savings allowance and personal allowances she has as a nil rate taxpayer.

Current taxable income: £6,000 leaving £4,600 Personal Allowance

Savings income: £1,000 leaving £4,000 of savings income allowance

Total allowances remaining £8,600

This allowance can be subtracted from the overall gain to arrive at the taxable gain.

Gain of £74,365 minus the combined remaining allowance of £8,600 = £65,765

We can then apply top slicing relief to the bond to establish what tax bracket the bond gain will be subject too.

Top Slicing relief = £65,765 divided by 7 full years = £9,395.

As we have used her personal and saving allowances to reduce the gain, the level of income applicable at this stage is now £15,600 (total of current income/interest plus remaining allowances used)

The top sliced gain added to this keeps her within the basic rate band (£24,995) and so the whole adjusted gain will be subject to basic rate tax at 20%.

Basic rate tax to pay will be 20% of the £65,765 adjusted gain = £13,153 tax payable

Summary

As noted, we found working examples of such a scenario almost impossible to find, despite spending many hours trawling technical and government websites – such fun! This does show the importance of factoring in remaining Personal Allowances and Savings Income Allowance on a bond surrender; for this client, it has resulted in an effective tax rate of around 6.2% which is pretty good for such a large surrender and high gains.

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