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2 min read 31 Mar 23
Q: What is the 5% tax deferred allowance?
A: This is a rule in tax law which allows investors to withdraw up to 5% of their investment into a bond, each policy year, without incurring an immediate tax charge.
Q: Why is the 5% tax deferred allowance important?
A: This is used in the calculation to determine if an Excess Chargeable Gain occurs. This is particularly important if large partial withdrawals across all the segments/clusters of a bond have been made in the policy year.
If withdrawals (regulars or partial) are taken which exceed the accumulated tax deferred allowance this can cause a large ‘artificial’ or Excess Chargeable Gain.
This can potentially cause a large tax liability, which bears no correlation to the economic performance of the bond.
Q: How do you calculate the 5% tax deferred allowance?
A: It's easier to do this by policy year. Here are some pointers to work out the available tax deferred allowance:
For the first year, compare the tax deferred allowance each year (5% of the investments in) to the withdrawals (including OAC) taken that year:
Going forward into the second and subsequent policy years, compare the tax deferred allowance (5% of the investment in + unused tax deferred allowance from previous years) to the withdrawals (including OAC) taken that year:
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