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3 min read 31 Mar 23
Q: What is a chargeable event?
A: A ‘chargeable event’ happens when certain events occur or money is taken out of a bond. Details are available here.
A calculation is done to see if a chargeable event gain arises.
Q: What are the tax consequences of a chargeable event gain on a bond?
A: If there is a chargeable event gain then there may be Income Tax due.
Q: What events cause a chargeable event gain?
A: Types of ‘event’ causing a chargeable event gain include:
Q: How do you know if a chargeable event gain has arisen?
A: Firstly you need to determine the circumstances causing the chargeable event. The type of event will determine the type of chargeable event gain calculation required and, indeed, when the chargeable event gain takes place. There are generally two types of chargeable event gain calculation:
Q: What’s the difference between a final gain and an excess gain?
A: A final chargeable event, as the name suggests, takes place when the bond, or segments of the bond, end. Events such as surrender in full or segments, death of the life assured giving rise to benefits and maturity are all final chargeable events.
An excess chargeable event happens when withdrawals are made above a certain limit, but the bond continues with all the segments intact. Part assignments for money or monies worth, and regular or partial withdrawals in excess of the 5% tax deferred allowance are excess chargeable events.
Q: Why is the excess gain so high when the bond might not made any profit?
A: Chargeable event legislation states that where withdrawals in the policy year exceed cumulative 5% allowances then a chargeable event gain will arise. It is important to remember that this ‘mechanical’ calculation bears no correlation to the economic performance of the bond.
Q: When is a gain calculation done?
A: A final chargeable event gain is calculated immediately.
An excess chargeable event gain calculation is done at the end of the policy year.
Q: Is the chargeable event gain calculation the same for a final and excess gain?
A: No, there are specific formulas for each type
What is the formula for a final gain?
For Full Surrender And Surrender Of Segments, Calculate The Gain As Follows: | |
---|---|
Surrender value |
|
Plus |
Previous withdrawal (sum of regular and partial withdrawals) |
Less |
Investments in (sum of premiums paid) |
Less |
Previous excess chargeable event gains |
Equals |
Final chargeable event gain |
If you are dealing with a surrender of segments, you need to remember to proportion the figures to the number of segments being encashed.
What is the formula for an excess gain?
For Regular Withdrawals And Partial Withdrawal Over The segments / clusters, It Is: | |
---|---|
Amount withdrawn over the policy year |
|
Compare to |
Available 5% tax deferred allowance |
Equals |
Excess chargeable event gain |
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