Annuity Rates, Annuities, Pensions, Divorce Latest Annuity Rates
Home News Annuity Rates Annuities Pension Annuity Impaired Annuity Annuity Quotes Pensions Divorce Resources
 
Annuity Rates



Annuity Rates
   Assets on Divorce
Valuation examples
Valuation Examples
Pension values can be
30% higher than the CETV.
  Valuation Examples  
 
Valuation reports
Valuation Reports
For only £25 you can value
a defined benefit scheme.
  Valuation Reports  
   Investment Bonds
  Investment Bonds
  Introduction   Single owner
  Segmentation   Joint owner
  Taxation   Top-sliced gain
    

  Back back All categories 6 of 7 next Next

 

Introduction
Single premium unit-linked or with-profits bonds are the most common route for both basic and higher *-rate taxpayers to invest through non-qualifying investment bonds. The advantage of these investment bonds is that the income within the providers funds rolls up after tax at a rate that is lower than an individuals personal tax at the basic rate.


The investor can take an income of up to 5% of the original investment per annum without an immediate tax liability, and this includes all higher rate tax payers. The income can be continued for 20 years until all the annual allowances have been taken.

However on encashment, such as the result of a financial order due to divorce, judicial separation or nullity of marriage, there can be significant tax consequences by dividing the bond between the parties. This depends on how the investment bond was structured initially using segmentation, the income of the policyholder and the method used to share the investment bond between the parties.



Segmentation
A significant factor influencing the tax consequences of an investment bond encashment or assignment on divorce will be the way the investment bond is structured at the outset. Although some investment bonds are established as a single policy, most providers write the policy as a series of "clusters" or "segments", typically 20 segments to a policy to match the 20 year term.

This means that a single policy is made up of a number of identical policies that can be treated independently of each other. This allows for the partial surrender or assignment of a policy on divorce by the encashment of individual segments thereby reducing the tax liability to the policy holder that is near to, or exceeds the higher rate tax threshold.


Taxation
The taxation of a non-qualifying single premium investment bond and other non-qualifying life or endowment policy (such as a TEP) is complex because there is a difference in the amount of tax paid between a full encashment or assignment and a partial encashment or assignment.

For divorce, during ancillary relief proceedings the parties must consider the tax liability created by dividing the investment bond as this liability may be much higher than the gains actually realised.

Encashment or assignment of the investment bond where the policyholder is a higher rate taxpayer means that any gains will attract a tax charge. If the policyholder is just below the higher rate tax threshold there may be a tax liability on the gain. If the policyholder is a basic rate taxpayer and significantly below the higher rate tax threshold it is unlikely that a tax charge will apply. To determine the tax liability the bond must be subjected to the top-slicing principle.


Top-sliced gain
To start with the total gain in the portion of the investment bond to be encashed or assigned must be divided by the number of complete years the policy has been in force. This will produce the average or top-sliced gain which is then added to the policyholders total income.

If the taxable income including the average gain is less than the higher rate tax threshold in the year the investment bond was encashed or assigned, then no personal tax would be payable on the gain.

If the taxable income including the average gain is more than the higher rate tax threshold in the year the investment bond was encashed or assigned, then the tax charge will be the difference between higher rate tax and basic rate tax, currently 18%. This applies to the excess of the average gain over the higher rate tax threshold multiplied by the number of complete years the policy has been in force.

For example, for the tax year 2002/2003 the higher rate tax threshold is £34,515 including the personal allowance of £4,615. A policyholder is just below the threshold with a total income of £34,000 including all taxable benefits. An investment was made 6 complete years ago with an initial investment of £60,000. The bond has averaged a return on investment (ROI) after charges of 6% and the investment bond is now worth £85,000.

On divorce the court grants a financial order whereby 50% of the investment bond is to be encashed and transferred to the former spouse. The chargeable gain to the policyholder will be as follows for both a single and segmented policy:

Single policy  
 
   
 
Encashment:
 
£42,500
 
   
 
Less allowance accumulated:
(5% x £60,000 x 6)
 
£18,000
 
   
 
Maximum chargeable gain:  
£24,500
 
   
 
Top-sliced gain:
(£24,500 / 6)
 
£4,083
 
       
Excess gain:
(£34,000 + £4,083) - £34,515
 
£3,568
 
       
Chargeable gain:
(£3,568 x 6)
 
£21,408
 
 
20 segment policy  
 
   
 
Encashment (10 segments):
 
£42,500
 
   
 
Original investment:
(10 x £3,000)
 
£30,000
 
   
 
Maximum chargeable gain:  
£12,500
 
   
 
Top-sliced gain:
(£12,500 / 6)
 
£2,083
 
       
Excess gain:
(£34,000 + £2,083) - £34,515
 
£1,568
 
       
Chargeable gain:
(£1,568 x 6)
 
£9,408
 

Therefore the above shows how segmented policy will result in a lower tax liability to the policyholder on divorce compared to a single policy. Nevertheless, the chargeable gain of £9,408 means that if the intention of the parties and the court was an equal division, an adjustment must be made to the percentage in the financial order to reflect the extra tax liability, if any, to the policyholder on partial encashment or assignment to the former spouse.


Single owner
If the single policyholder on divorce is not to retain the investment bond in whole, then the options and tax consequences are as follows:

Fully encash the investment bond and share the proceeds with the former spouse - The policyholder will be liable for the tax charged on any gain in the policy but will enjoy only partial benefit in the proceeds;
   
Assignment of the whole investment bond to the former spouse - The policyholder will be liable for the tax charged on any gain in the policy and will not benefit in the proceeds;
   
For an investment bond set up as a single policy, there can be a partial assignment of the rights to a former spouse - Any excess gain that is chargeable will be allocated to each party on a pro rata basis. The tax paid, if any, will depend on the top-slicing principle applied to their total income;
   
Where the investment bond is segmented, the assignment of some of these segments to the former spouse - Here the policyholder will be liable for the tax charged on any gain only on the segments assigned;
   
For an investment bond set up as a single policy, the partial encashment of the policy so that monies can be transferred to the former spouse - Here the policyholder will be liable for any excess gain that is chargeable.
   
Where the investment bond is segmented, the encashment of some of the segments so that monies can be transferred to the former spouse - Here the policyholder will be liable for the tax charged on any gain only on the segments assigned;


Joint owner
Where an investment bond is jointly owned, the court may require that one spouse will receive the entire benefit of the policy. In this case the Inland Revenue considers this to be a partial assignment and therefore result in chargeable excess gain. However, the tax liability will be the responsibility of the assignee, the person receiving the benefit of the investment bond.

If on divorce the investment bond is to be shared between the parties, then action has to be taken by the court to achieve a clean break. This is because if the policy is left in force in its current joint owner structure the benefits of the policy will revert to the surviving party if the other dies. The options and tax consequences are as follows:

Fully encash the investment bond and share the proceeds between the parties - Any excess gain that is chargeable will be allocated to each party on a pro rata basis. The tax paid, if any, will depend on the top-slicing principle applied to their total income;
   
Where the investment bond is segmented, the assignment of specified segments to each of the parties - Any excess gain that is chargeable will be allocated to each party on a pro rata basis. The tax paid, if any, will depend on the top-slicing principle applied to their total income;
   
Placing the policy into trust for the parties with agreed shares absolutely and the appointment of an impartial additional trustee - There will be no tax consequences unless the agreed shares differ from the beneficial interest in the policy prior to divorce.
top of page Top
Bookmark with: Add Bookmark What are these?
Annuity Rates
Single
  55 £4,748  
  60 £5,239  
  65 £5,900  
  70 £6,741  
Joint
  55 £4,618  
  60 £4,983  
  65 £5,429  
  70 £6,094  
£100,000 purchase, level and standard rates
Latest Rates
Annuity Quotes
 
Get A Quote
Sharingpensions.co.uk   This website is for marketing purposes only and does not provide specific financial or legal advice. Website security issued by GeoTrust and Equifax. Copyright©2001-14 Sharingpensions.co.uk. All Rights Reserved