Understanding the taxation of investment bonds
Up to 60 CPD minutes
Introduction
Bonds enjoy unique tax treatment which allows income and gains to be rolled up and deferred until the proceeds are taken. Flexibility to control when gains may arise and who they may be taxed upon means advisers must fully understand how bonds are taxed.
This module should take around 60 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 60 minutes can be claimed.
This module should take around 60 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 60 minutes can be claimed.
Outcomes
On completion of this module you should be able to:
- Determine when a chargeable gain arises on part and full surrender of a bond and how it is taxed
- Explain the difference in taxation between gains on onshore and offshore bonds
- Describe how top slicing relief may reduce the tax on gains
- Illustrate how making a pension or gift aid contribution can reduce the tax on a chargeable gain
Learning material
This module explains when chargeable events may arise and how chargeable gains will be taxed. It also explains how top slicing and other reliefs can potentially reduce any tax liability and how to report bond gains to HMRC.
CPD minutes: up to 60
Read the Taxation of bonds guideOpens in new windowCPD minutes: up to 60
Post learning assessment
Question 1
Which of these is NOT a chargeable event?
a. The death of the last life assured
b. Taking withdrawals within the 5% tax deferred allowances
c. Assigning segments for money, or money’s worth
d. Fully surrendering a whole bond
a. The death of the last life assured
b. Taking withdrawals within the 5% tax deferred allowances
c. Assigning segments for money, or money’s worth
d. Fully surrendering a whole bond
Question 2
Derek has recently surrendered segments in his offshore bond, which he took out in 2012. He has no other income in the tax year and incurs a £20,000 chargeable gain. How is Derek taxed on the gain?
a. 20% on the full gain
b. 0% within Personal Allowance only, and 20% on the balance
c. 0% within Personal Allowance and Personal Savings Allowance, and 20% on the balance
d. 0% within Personal Allowance, Starting Savings rate band and Personal Savings Allowance, with 20% on balance
a. 20% on the full gain
b. 0% within Personal Allowance only, and 20% on the balance
c. 0% within Personal Allowance and Personal Savings Allowance, and 20% on the balance
d. 0% within Personal Allowance, Starting Savings rate band and Personal Savings Allowance, with 20% on balance
Question 3
In which of the following circumstances would top slicing not apply?
a. The full gain when added to other income is below the higher rate tax threshold
b. The bond holder is already a higher rate taxpayer
c. The full gain when added to other income exceeds the additional rate threshold
d. The average gain when added to other income pushes the bond holder from basic rate into higher rate
a. The full gain when added to other income is below the higher rate tax threshold
b. The bond holder is already a higher rate taxpayer
c. The full gain when added to other income exceeds the additional rate threshold
d. The average gain when added to other income pushes the bond holder from basic rate into higher rate
Question 4
Vivienne surrenders her onshore bond and there is a chargeable gain. The average gain when added to her other income exceeds the higher rate threshold by £5,000.
Which of the following statements are correct?
a. Making a gift aid donation of £5,000 will mean no further tax is payable on the bond gain
b. A gross pension contribution equal to the full gain is the only way to avoid paying any further tax on the bond gain
c. Making a gross pension contribution of £5,000 will extend the basic rate band meaning no further tax is payable on the bond gain
d. Only pension contributions made by salary sacrifice can help to avoid further tax on the bond gain
Which of the following statements are correct?
a. Making a gift aid donation of £5,000 will mean no further tax is payable on the bond gain
b. A gross pension contribution equal to the full gain is the only way to avoid paying any further tax on the bond gain
c. Making a gross pension contribution of £5,000 will extend the basic rate band meaning no further tax is payable on the bond gain
d. Only pension contributions made by salary sacrifice can help to avoid further tax on the bond gain
Check your answers
Which of these is NOT a chargeable event?
b. Taking withdrawals within the 5% tax deferred allowances
b. Taking withdrawals within the 5% tax deferred allowances
Derek has recently surrendered segments in his offshore bond, which he took out in 2012. He has no other income in the tax year and incurs a £20,000 chargeable gain. How is Derek taxed on the gain?
d. 0% within Personal Allowance, Starting Savings rate band and Personal Savings Allowance, with 20% on balance
d. 0% within Personal Allowance, Starting Savings rate band and Personal Savings Allowance, with 20% on balance
In which of the following circumstances would top slicing not apply?
a. The full gain when added to other income is below the higher rate tax threshold
a. The full gain when added to other income is below the higher rate tax threshold
Vivienne surrenders her onshore bond and there is a chargeable gain. The average gain when added to her other income exceeds the higher rate threshold by £5,000.
Which of the following statements are correct?
c. Making a gross pension contribution of £5,000 will extend the basic rate band meaning no further tax is payable on the bond gain
Which of the following statements are correct?
c. Making a gross pension contribution of £5,000 will extend the basic rate band meaning no further tax is payable on the bond gain
Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.