Financial planning

INVESTMENT BONDS - WHEN A TOP SLICE ISN'T A PIECE OF CAKE

In 2020 the rules and calculation method around top slicing changed, meaning some of our clients who have sold all or part of their bonds may now have an incorrect tax position and could be due a tax refund.

10 March 2022
4 minutes

It is perhaps hard to recall the total lack of choice offered via the compulsory purchase of a pension annuity pre-April 2011 at age 75. Individuals could be forgiven for approaching their 75th birthday with some trepidation, as not only would there be an extra candle on the cake but they would be confronted overnight with a drop of 25% in their maximum allowed income from 120% to just 90% of the Government Actuarial Department (GAD) limit, plus the introduction of annual reviews. 

It is fair to say that legislation has progressed significantly over the past decade, most notably with the introduction of flexi-access drawdown in April 2015, to now enable individuals' control over their retirement income and the ability to manage their estate.

It is because of these historically rigid positions around retirement income that many clients would work towards building a portfolio of onshore and offshore bonds with the intention of flexibly accessing tax-deferred funds, typically in retirement. In addition, many chose to use several bonds rather than a single provider to diversify their investments as this was prior to open architecture bonds, with each company only offering a limited number of funds, mostly using their with-profits options.

As a result of this many clients are now sitting on accrued gains across a portfolio of bonds where the available 5%’s may have been exhausted, or are close to running out. As a result, they are wondering how to deal with the potential double tax liability looming in the distance, both income tax on the gain accrued and inheritance tax (IHT) on the bond remaining.

Life assurance bonds, while offering potential benefits when considering care home asset calculations, do carry with them the inevitable tax assessment on death of the lives assured. They also typically will not allow for future assignments into trust to allow for IHT planning and the often limited number of segments provides its own dilemma when considering a phased encashment approach.

Additionally, unlike a General Investment Account (GIA) there is no automatic rebasing of the gains upon death therefore funds within these bonds could potentially be subject to income tax on any accrued gain but also IHT, meaning a client's estate could possibly suffer up to circa 60% tax on these bonds.

Following the case of Marina Silver v HMRC (TC07013) changes were brought about. Not only were bond calculations amended in the 2020 Spring budget for gains arising from 11 March 2020 onwards but HMRC later confirmed this retrospective change would apply to those individuals who had realised gains from 2018/19 onwards. This means all tax calculations carried out from 2018 could now be incorrect and should therefore be reviewed due to the potential for tax rebates.

As a result of the changes brought about by the case and the resulting legislation, we believe that the encashment and rebasing of bonds - both onshore and offshore - should, in most scenarios, never be more penal than the rebasing of either an ISA or a GIA account as we would endeavour to cap the tax liability at no more than 20% (which for on-shore bonds means zero exit tax charge applying, since it is already deemed to have incurred this internally within the bond).

This provides a good opportunity for investors to continue to develop their income tax and estate planning without feeling like they are a sitting duck, waiting for HMRC to take aim at their ‘golden nest eggs’.

We at Mattioli Woods pride ourselves on working with accountants and accountancy firms to meet their clients' objectives in all areas of financial planning, and we believe these changes have truly opened up opportunities for the rebasing of existing wealth to make it more accessible while providing an ability to future proof against IHT going forward.

Please contact your Mattioli Woods consultant if you wish to discuss these changes further, we would be happy to help.

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