In our day-to-day work as paraplanners, we regularly see recommendations in regards to surrendering investment bonds for a variety of reasons. For example, restructuring investments more tax efficiently, poor performance, and to reset the 5% allowance clock.

As a surrender is a chargeable event, if there’s a gain crystallised, there can be tax to pay depending on the bond owner’s situation; including the bond type, whether it’s onshore or offshore, and their income tax position.

In the event of tax being payable, the bond owner may decide to pay this, or they might stagger the surrender over a number of tax years to avoid paying any unnecessary tax. This could be tax payable on the gain itself or, if it pushes their adjusted net income over £100,000, extra tax on their income as a result of losing part or all of their personal allowance.

But is there anything else we should be considering?

If a bond owner has been a non-resident at any point during the life of the policy, then they could be eligible for Time Apportionment Relief (TAR), which could be used to reduce the gain and, as a result, the tax payable. Especially as it is the reduced gain that would be added to their ‘adjusted net income’ to determine if the personal allowance will be reduced.

The TAR formula

The application

TAR can apply to gains from offshore bonds regardless of when the plans were taken out, but this isn’t the case for onshore bonds. The rules only changed to include gains from onshore bonds as well with effect from 6th April 2013.

These revised rules also stated that relief should be calculated based on the non-residency and ownership of the person responsible for paying the tax at the time of surrender. So, if the plan had changed ownership, the relief would be based on any non-residency since the assignment occurred, rather than the whole term. This can have significant implications when the ownership has changed hands; although, there is an exception for assignments between spouses/civil partners living together.

So, does this mean TAR can’t be applied to gains from onshore bonds taken out before the rule change came into effect?

Yes, and no…

TAR can be applied to gains from onshore bonds taken out before this date but only if the plan has been incremented, i.e., topped up, or assigned after the 6^th April 2013. Such an action will bring the onshore bond under the remit of the revised rules, which caters for both offshore and onshore bonds.

To summarise

Is TAR available? And, if so, what rules should we be looking at?

The TAR formula in practice:

Jeff wants to surrender his offshore bond that he’s held for 2,190 days. The chargeable gain upon surrender has been calculated as £100,000. Jeff was a non-UK resident for 1,460 days of the policy period, but is now a UK resident again.

The reduction in gain would be calculated as follows:

The gain after TAR would therefore be £33,333 (£100,000 – £66,667).

So, as you can see, the impact of TAR can be quite significant!

Please note, however, the application of TAR can influence other elements of the tax calculations, including how top slicing relief is calculated. It is therefore important to thoroughly read up on the full rules beforehand.

Alex Buckle, The Verve Group