Module 5 – How to work out the gain
What is the gain?In this module we’ll explore how a gain can only arise on a bond when there is a chargeable event.
For both onshore and offshore bonds, there are six main events that trigger a chargeable event. Each of these events can lead to a chargeable gain. The gain then becomes liable for tax (we’ll cover this part in modules 6 and 8).
The six chargeable events are:
Let’s examine each event in turn and look at an example of how the gain is calculated. The calculation is basically the same for most cases but there are some exceptions.
1. Death – giving rise to benefits
On death, the excess of the surrender value immediately before death, plus the total amount of all previous partial withdrawals, if any, minus the total amount of premiums paid, plus the total taxable gains on any previous chargeable events.
Surrender value before death + previous withdrawals
minus
Premiums paid + previous chargeable gains
Premium of £60,000
Mr Smith's policy has a surrender value before his death of £80,000
He makes withdrawals of £3,000 a year, for four years = £12,000
£80,000 + £12,000 = £92,000
- £60,000
Gain = £32,000
2. Full surrender of the bond
On full surrender, the excess of the surrender value payable, plus the total amount of all previous partial withdrawals, if any, minus the total amount of premiums, plus the total taxable gains on any previous chargeable events.
Same as for death but use actual surrender value.
Mrs Nickerson, the policyholder, invests £50,000 in an offshore bond. After five years, the bond is fully surrendered at a surrender value of £70,000. She has made no withdrawals.
Calculation of gain:
Final surrender value payable = £70,000
Plus previous withdrawals = nil
= £70,000
Minus
Total premium paid = £50,000
previous chargeable gains = nil
Gain on final surrender of the policy = £20,000
3. Maturity
On maturity, the excess of the maturity value payable, plus the total amount of all previous partial withdrawals, if any, minus the total amount of premiums paid, plus the total taxable gains on any previous chargeable events. This mainly applies to capital redemption bonds (CRBs). Same as for death but use maturity value instead of surrender value.
This course won’t be investigating CRBs and maturity dates.
4. Assignment for money or money’s worth
On sale of the bond to a third party, the excess of the sale price payable, plus the total amount of all previous partial withdrawals, if any, minus the total amount of premiums paid, plus the total taxable gains on any previous chargeable events.
Same as for death but use value obtained at point of sale instead of surrender value.
We’ll cover this in more detail later in this module.
5. Partial withdrawals across all segments
The gain is the amount withdrawn minus the available 5% cumulative allowance.
We cover the 5% rule in module 6.
We’ll cover this in more detail later in this module.
6. Full surrender of individual segments
Same treatment as for full surrender of policy but use the current surrender value, premium and earlier transactions relating to surrendered segments only.
Mr Ball, the policyholder, invests £50,000 in an offshore bond the final surrender value is £70,000. The bond has 10 segments. Mr Ball wants to make a withdrawal of £14,000.
Calculation of gain:
Surrender 2 segments
£70,000 X 2/10 = £14,000
+
Previous withdrawals = nil
= £14,000
Minus
Total premium paid = £50,000 x 2 segments
10
Add all previous chargeable gains = nil
= £10,000
Gain = £ 4,000
Which of the following chargeable events could apply when withdrawing only part of the money in a bond? You can find the answer at the end of this module.
Option 1 – Partial withdrawals across all segments
Option 2 – Assignment of value
Option 3 - Death
Option 4 - Maturity
Option 5 – Total surrender of the policy
Option 6 – Full surrender of individual segments
To summarise, there are six ways that a chargeable event can give rise to a gain on a bond:
Answers to questions in module 5
Question 1
Which of the following chargeable events could apply when withdrawing only part of the money in a bond?
Option 1 – Partial withdrawals across all segments
Option 2 – Assignment of value
Option 3 - Death
Option 4 - Maturity
Option 5 – Total surrender of the policy
Option 6 – Full surrender of individual segments
Answer
The correct response is options 1 and 6. The chargeable events that apply to withdrawing part of the fund in a bond are: