Time apportionment relief
Time apportionment relief formula
Time apportionment relief - example 1
Question 1
Acceptable assets
Highly personalised bonds - unacceptable assets
Question 2
Summary
Answers to questions in Module 10
Welcome to the last module in this course. Here we’ll look at some of the exceptions that apply to bonds taxation.
An individual may be entitled to time apportionment relief if they own an offshore bond and they’ve been non-resident in the UK at any time during the term of the policy.
The gain after time apportionment relief will be subject to income tax at the rate applicable to the policyholder. For higher rate tax purposes, the number of complete years the policy has been in force for top slicing is reduced by the number of complete years the policyholder has been resident outside the UK.
Time apportionment relief formula
The part of the gain relating to the period of non-residence is not liable for UK tax. The calculation is:
Amount of reduced chargeable gain liable for tax = total gain X Total number of days resident in UK
Total days bond has been in force
If, however, top slicing is being applied here, the period of non-residence is excluded from the number of years used to calculate the slice. For example, if the bond is owned for 10 years and the owner has been non-resident for four years, the number of years applicable for top slicing will be six years.
These rules apply to offshore bonds only.
Time apportionment relief - example 1
Mrs Neave invests £50,000 in an offshore bond. After five years and one month (1,855 days), the bond is fully encashed for a surrender value of £65,000. No partial withdrawal has been taken.
Mrs Neave has been a UK resident for the final period of two years and one month (760 days), and was resident outside the UK during the first period of three years (1,095 days).
The total gain is equal to a final surrender value payable of £65,000 minus the total premium paid of £50,000, which creates a total gain of £15,000. The total gain arising on surrender will be reduced using the formula:
£15,000 x 760 = £6,145
1855
The reduced gain of £6,145 will be subject to income tax at the rate applicable to the policyholder. The number of years for top-slicing purposes (for higher rate tax liability) is reduced by the number of complete years that Mrs Neave was resident outside the UK, so in this example two years is applicable for top slicing purposes.
Have a go at the question below. You can find the answer at the end of this module.
Mr Barker has an offshore bond and has lived outside the UK for some years. What calculation should he use to identify the gain liable for tax when he surrenders it?
Reduced (chargeable gain) liable for tax = total gain x ?
Total days bond owned
Option 1 – Total number of days non-resident in UK
Option 2 – Total number of days resident in UK
What is an acceptable asset?
An acceptable asset is an asset that can be linked to a bond without that bond falling foul of UK anti-avoidance tax legislation. The legislation gives a list of acceptable collective investments and examples of these include:
If the bond only contains acceptable assets then it will be liable for tax under the normal rules (as we’ve outlined throughout the course). If it contains unacceptable assets it may become a highly personalised bond.
Highly personalised bonds – unacceptable assets
A highly personalised bond contains unacceptable assets.
If the bond contains unacceptable assets then special tax rules apply and the bond will be subject to a yearly deemed gain of 15% applied to compounded premium for UK residents.
It’s highly unlikely that this type of bond would be suitable to a UK investor, although it could appeal to non-UK residents.
Here’s a question to try out. You can find the answer at the end of this module.
An unacceptable asset is an asset which isn’t included in the acceptable list of collective investments. If a bond is linked to an unacceptable asset, which of the following statements is true?
Option 1 - The bond is subject to a deemed yearly chargeable event gain of 15%.
Option 2 - The bond is subject to a chargeable event gain of 20%.
Option 3 – The bond is subject to a yearly tax of 15%.
Option 4 - The bond is subject to a yearly tax of 20%.
You’ve now completed all the bonds taxation modules.
This eLearning course has highlighted a number of key calculations for working out the tax due from bonds investments.
As we’ve seen, there are several ways to calculate tax liability on a bond. If we get it wrong, the policyholder’s tax liability could be much higher than it needs to be.
Answers to questions in module 10
Question 1
Have a go at the question below.
Mr Barker has an offshore bond and has lived outside the UK for some years. What calculation should he use to identify the gain liable for tax when he surrenders it?
Reduced (chargeable gain) liable for tax = total gain x ?
Total days bond owned
Option 1 – Total number of days non-resident in UK
Option 2 – Total number of days resident in UK
Answer
The correct answer to complete the equation for calculating the gain is option 2.
Reduced (chargeable gain) liable for tax = total gain x Total number if days resident in the UK
Total days bond owned
Question 2
Here’s a question to try out.
An unacceptable asset is an asset which isn’t included in the acceptable list of collective investments. If a bond is linked to an unacceptable asset, which of the following statements is true?
Option 1 - The bond is subject to a chargeable event gain of 15%.
Option 2 - The bond is subject to a chargeable event gain of 20%.
Option 3 – The bond is subject to a yearly tax of 15%.
Option 4 - The bond is subject to a yearly tax of 20%.
Answer
Did you select the right answer, option 3? If a policyholder has a personalised portfolio with unacceptable assets, the bond has a deemed yearly gain of 15%.