Bond C had been in force for 5 complete years and produced a chargeable gain of £15,000. Alexander’s total gains for the tax year 2017/18 are now £42,600.
Firstly, we must calculate the total top-sliced gains. The top-slice gain for Bond C is £15,000 / 5 = £3,000, giving the total top-sliced gains as £6,300.
As potentially there is no tax imposed on the income and gains of the underlying funds of an international bond the whole gain is chargeable to 20%, therefore the basic rate liability is £15,000 x 20% = £3,000. The UK bonds are already deemed to have paid basic rate tax.
£2,000 of the gain is covered by the remainder of the basic rate tax band. Therefore £4,300 of the top-sliced gain is chargeable at the higher rate of 20%. Additional tax payable on the top-slice is therefore £4,300 x 20% = £860.
Once the additional tax has been calculated it needs to be pro-rata’d across the three bonds being surrendered. This will provide the amount of the additional tax attributable to each individual bond.
Bond A = 860 x (2,400 / 6,300) x 10 = £3,276.19
Bond B = 860 x (900 / 6,300) x 4 = £491.43
Bond C = 860 x (3,000 / 6,300 x 5 = £2,047.62
Alexander has a tax liability of £8,815 against the chargeable gains. In addition to the higher rate tax liability of £5,815, he has a basic rate tax liability of £3,000 on the international bond.
So, remember where a client has surrendered more than one investment bond, in any one tax year, the chargeable gains are aggregated together. UK bonds are treated as savings income but as they carry a tax credit any chargeable gains are treated as 'the highest part of the individual's total income'. But where a client has surrendered two international bonds in the same tax year, the chargeable gain could benefit from the 0% starting rate for savings and the personal savings allowance.
However, if there is a combination of UK and international bonds being surrendered, the chargeable gains are all treated as the highest part of the individual’s total income. This approach does not recognise that international bonds are taxed with other non-bond savings income while UK bonds are taxed as a top-slice on top of dividend income (despite being savings income).
Kim Jarvis, Technical Manager, Canada Life. There’s an enormous amount of information on our Technical Briefing Notes page about multiple gains and other common issues, and you can also find out more about our range of savings and investments solutions.
