How to avoid tax selling a Standard Life Capital Investment Bond

[syrio]

I'm looking at how to sell a Standard Life Capital Investment Bond on behalf of a relative. The reason being that the charges are high, performance is poor and it looks like an extremely stupid way to invest.

Current value of the bond is approx £84k
Initial investment in 2008 was £71.5k
No withdrawals have been made since the initial investment

The key features document for the bond is here, there are sections on Withdrawals and Chargeable gains.

http://library.adviserzone.com/cib17.pdf

I have only just started looking into this and don't understand it at all. I thought that it would be possible to sell a portion of the investment and use this this years CGT allowance to avoid paying tax. But it seems that this isn't possible. It looks like withdrawals from the bond are taxed more like income. Which is a problem, since there isn't much basic rate income allowance left.

The key features document says I can take tax deferred withdrawals of up to 5% of the total payments made, and that these can be carried forward if not used. So I should shortly have 10 years worth of 5% deferred withdrawals = 50% of the initial value.

Does anyone know about this, or can you point me to some resource that explains it a bit better.

[Alaric]

Does anyone know about this, or can you point me to some resource that explains it a bit better.

The magic word is "Chargeable event".

http://www.scottishwidows.co.uk/extrane ... /bond-gain
http://www.scottishwidows.co.uk/Extrane ... Doc/FP0003

If it's issued by a UK provider, the underlying investments are taxed in the hands of the providing life assurer, so there shouldn't be any additional tax for a basic rate tax payer.

Note the example of "Brian" on the FP0003 document.

Page 9 of your link also refers.

[syrio]

Thanks, I found the Scottish Widows link FP0003 much easier to understand.

So selling it all now would give a chargeable event of £12.5k.

If it were like the Brian example - total taxable income plus £12.5k is below the basic rate limit, then there is no tax to pay.

If it were like the Anne example, and the gain takes me into higher rate tax - then I calculate top slicing relief.

Bond has been in force for 10 years - so £12.5 / 10 = £1250

Add £1250 to total taxable income for the year.

If the extra £1250 doesn't cause the income to attract any higher rate tax, then there is no tax payable.

Otherwise work out how much of the £1250 is affected by 40% tax, and then multiply by the number of years and 20%. e.g. if £500 attracts 40% tax, then £500 * 20% = £100 * 10 years = £1000.

So if I want to do it tax efficienty, then I work out how much I can withdraw this year without hitting 40% tax.

Then if there is any money left in the bond, withdraw it in subsequent years taking care not to go into the 40% tax band.

Any comments? Is there a better way of doing it?

Although I still don't understand about being allowed to take 5% withdrawals each year which the Standard Life document mentions, but isn't mentioned in the Scottish Widows. Can I combine taking 5% or 10 years unused 5% withdrawals along with top slicing?

[DrBunsenHoneydew]

Although I still don't understand about being allowed to take 5% withdrawals each year which the Standard Life document mentions, but isn't mentioned in the Scottish Widows. Can I combine taking 5% or 10 years unused 5% withdrawals along with top slicing?

It means that if you take no more than 5% per year, you don't have to worry about calculating any income tax for those years. Take more and there will be a small chargeable element.

[Alaric]

Then if there is any money left in the bond, withdraw it in subsequent years taking care not to go into the 40% tax band.

Any comments? Is there a better way of doing it?

Although I still don't understand about being allowed to take 5% withdrawals each year which the Standard Life document mentions, but isn't mentioned in the Scottish Widows. Can I combine taking 5% or 10 years unused 5% withdrawals along with top slicing?

You should find the bond is written as a multitude of policies. If you are only surrendering part of the Bond, there's some quirk of the tax laws which makes it better to surrender whole policies.

The 5% withdrawal is just that. You can take 5% annually or use it at the end for top slicing. It's a sort of capital allowance whereby you run the capital to zero over 20 years. Being a return of capital, it isn't taxed.

I'd expect the charges are high in comparison to alternatives, but if investment performance or allocation is the concern, it would be possible to switch funds inside the Bond without incurring CGT.

[syrio]

You should find the bond is written as a multitude of policies. If you are only surrendering part of the Bond, there's some quirk of the tax laws which makes it better to surrender whole policies.

Yes, thanks. I came across that problem earlier in my research. It is certainly something to watch out for.

I'd expect the charges are high in comparison to alternatives, but if investment performance or allocation is the concern, it would be possible to switch funds inside the Bond without incurring CGT.

I dislike the added complexity and charges of investment bonds and their early withdrawal penalties. The charges aren't anywhere near clear enough, and I can't easily find a list of alternative funds.

My records indicate that the total charges was something like 1.6%, but they seem to have changed the website and I can't find the information now, and frankly I can't be bothered looking. I'd rather have the money out of there and in a normal fund in a broker account and not have to faff around with a different website.

Performance has been poor, it has been in the Standard Life SLI Global Absolute Return Strategies Life 2 Fund, and over 10 years it has had a CAGR of 1.6%. Might as well have been in cash, and would have easily been outperformed by a stock/bond portfolio.