The recent Growth Plan issued by the Chancellor detailed a cut in the basic rate of income tax to 19%. This change takes place from the next tax year and will have an impact on individuals who are thinking of cashing in their investment bonds
Basic rate taxpayer
For those of your clients that are basic rate taxpayers the basic rate of income tax is reducing to 19%. Where clients hold onshore bonds, they will still be given a credit equivalent to the basic rate of tax (i.e. 19% from 6 April 2022) against gains realised on the surrender of investment bonds. This means, therefore, there will be no change to their tax position either before or after the new tax year.
If your clients hold international (offshore) bonds, it is worth considering delaying the surrender until the new tax year to take advantage of the lower basic rate of income tax of 19%.
Higher rate taxpayer
If your clients are higher rate taxpayers the position is different, in that, for onshore bonds, they will still receive a tax credit but, as this will reduce to 19%, it will leave them paying the difference between basic and higher rate which becomes 21% after 5 April 2023.
In this case, a higher rate taxpayer may not want to delay the surrender of their onshore nd as he will pay less in the current tax year compared to the new tax year.
In respect of international bonds, its neutral, as the client will still pay 40% on any chargeable event gains before or after the change.
Additional rate taxpayer
If your clients are additional rate taxpayers, for onshore bonds, they will have to pay an additional 26% due to the reduction in the basic rate tax credit to 19%.
In this case, an additional rate taxpayer may not want to delay the surrender of their onshore bond as they will pay less in the current tax year compared to the new tax year.
In respect of international bonds, its neutral, as the client will still pay 45% on any gains before or after the change.
Comment
Due to the reduction in the basic rate of tax, some clients will be better off delaying the surrender of their bonds until the new rates come into force. You can see from the table below a summary of the position for your clients:
| Onshore bonds | International bonds | |
| Non-taxpayer | no change, basic rate tax credit will reduce to 19% | no change |
| Basic rate taxpayer | no change, basic rate tax credit will reduce to 19% | consider delaying encashment to utilise lower basic rate of tax |
| Higher rate taxpayer | don’t delay, as basic rate tax credit is reducing, thus tax due will increase to 21% | neutral, i.e. 40% before and after the tax year end |
| Additional rate taxpayer | don’t delay, as basic rate tax credit is reducing, thus tax due will increase to 26% | neutral, i.e. 45% before and after the tax year end |
However, as always, you should do a comparison calculation using the rates before and after the new tax year changes to make sure which regime gives your client the best tax outcome.
Also, note that the above is covering the timing of a chargeable event gain where a bond or segments of a bond are surrendered in full. It’s important to remember that a chargeable event gain on full surrender of an investment bond, or segments of a bond, occurs on the date of surrender, whilst a chargeable event gain on a partial withdrawal, i.e. where a bond continues with all the segments intact, usually occurs on the next policy anniversary.