In some respects, Insurance Bond taxation is nice and simple. No income arises for the investor, so no annual self-assessment obligations. Bonds therefore don’t fit naturally into the annual rhythm of the income tax system. Instead, tax is deferred until a chargeable event arises and a gain is calculated on that event. Easy? Yes, in some cases, but as we approach the end of the tax year, where Bond encashments are being contemplated and tax calculations need to be performed, then let’s remind ourselves of the building blocks required to perform those tax calculations. A Bond encashment does, of course, give rise to a chargeable event.
Consider Anna, who is a client living in Manchester. In 2019/20 her salary is £48,400. She has held an Onshore Bond for just over eight years, which she is fully surrendering. Her original premium was £100,000 and the current surrender value is £92,000. She has taken total withdrawals within 5% limits of £32,000.