Session 002: Bond taxation while invested Q&A

Q. In that last example where the client had 85 segments remaining, does that mean he has 85% of the tax deferred allowance available i.e. £42,500?

A. Yes, that’s correct. If John surrendered 15 segments, his tax deferred allowance going forward will be based on those remaining 85 segments.

Q. Expat holds an offshore bond and assigns it to a UK resident, will UK res get the 5% for the remainder of 20 years from inception or 20 years from assignment?

A. The assignment will not disturb the tax deferred allowance (TDA) on the bond. The assignee will pick up the existing position. For example, client invests £100k in the bond before leaving the UK. 9.5 years later the bond is assigned to UK assignee. No withdrawals taken by the original owner (including ongoing adviser charges). In this scenario there would be £50k of unused TDA available to the assignee. A further £5k of TDA will accrue each of the following 10 policy years at which point no further TDA will accrue on the original premium. Any unused TDA can be carried forward beyond 20 years.

It should be noted that the TDA is a feature of UK chargeable event legislation which won’t apply in the original owners non-UK jurisdiction. If a UK individual moves abroad and they own an offshore (or onshore) bond they’ll need to seek tax advice in their new home country to understand how the bond will be treated for tax purposes. It is not uncommon for non-UK tax authorities to require gains to be reported annually, which is in contrast to UK rules where a tax liability only occurs when a chargeable event arises. Nevertheless, the bond provider will still administer the bond in line with UK chargeable event rules, even though those rules won’t be relevant to a non-UK resident policyholder.

Q. If a joint bond do the individuals have 5% each tax deferred allowance?

A. No, the tax deferred allowance (TDA) applies at bond level, not policyholder level. For example, the 5% TDA on a £100k premium is £5,000 for the first policy year and subsequent 19 policy years, regardless of whether the bond is owned by one individual, two individuals or held in trust.

Q. How is the 20 year tax deferred effectively paid? Personally I presume as with any CE?

A. We are unsure what you mean.

Withdrawals within the tax deferred allowance (TDA) don’t tigger a chargeable event so there is no tax payable when receiving a withdrawal within the TDA.

When the bond reaches the 20^th anniversary there isn’t an automatic chargeable event. What happens at the 20^th anniversary is no further TDA accrues but any unused TDA is carried forward and can be used beyond the 20^th anniversary.

If the investor takes a withdrawal across segments at any point (before or after 20 years) which is in excess of the TDA, then it will trigger an excess event gain. That excess event gain will be assessed for tax at their marginal rate but whether tax is payable or not will depend on their circumstances.

All withdrawals taken within the TDA will be taken into account in the final gain calculation i.e. when the bond ends due to surrender (full bond or individual segments) or death, maturity or assignment for monies worth (although a maturity or assignment for monies worth event is rare).

If we have misunderstood the question in anyway, please get in touch with your usual M&G contact who will be able to set up a call with our team if you would like to discuss your query further.

Q. How do you calculate the tax deferred allowance in respect of remaining segments after segment surrender when there have been top-ups?

A. Let’s consider the £100k original premium and a £50k top-up in policy year six from today’s session and move onto policy year eight and assume no withdrawals taken. There would be a total of £47,500 of TDA available (8 x £5k on original premium and 3 x £2.5k on the top-up premium).

Now lets assume the bond started with 100 segments and in policy year eight the investor surrenders 20 segments. Post the 20 segment surrender transaction you are simply looking at the premium history of the remaining 80 segments so 80/100 of the premiums paid. The TDA would therefore be £38,000.

This is clearly a simple example. It can get much more complicated, if there’s withdrawals pre and post segment surrenders, and sometimes top-ups post segment surrenders. This is where the bond gain tools offered by bond providers do the heavy lifting for advisers and paraplanners.

If you haven’t already used the Bond Gain Tool on our Tech Matters, get in touch with your M&G contact and they should be able to get an account manager to give you a demonstration. If need be, the account manager can also arrange a Teams call with a member of our team.

Q. How would you specify a withdrawal is to be made under a chargeable events vs being part of 5%?

A. The 5% tax deferred allowance (TDA) is a mechanism of the chargeable event regime. I think what you mean is how do you ensure that the withdrawal method utilises the TDA?

There are essentially two types of withdrawal from a bond (a subject I’ll be covering in the next session of bond school). They are “full”  surrenders (which includes individual segments) or “partial” surrenders that are taken equally across all existing segments (e.g. a regular withdrawal instruction, ongoing adviser charge instructions and sometimes a one-off partial withdrawal).

The gains that might arise from these two types of surrender are calculated differently. The gain calculation for a “full” surrender doesn’t factor in the TDA. It is only “partial” surrenders across segments that utilise the TDA rules. This means the instruction to the bond provider must be clear the withdrawal to be taken equally across existing segments, not for segments to be surrendered.

Bond provider withdrawal instruction forms generally make the options clear for the different withdrawal method options.

Q. Do the tools calculate max tax deferred withdrawal inclusive of OAC?

A. The Bond Gain Tool on our Tech Matters site will tell you the available TDA based on your inputs. This means you need to include any OAC in the withdrawal input section for the relevant policy year. For example, if the investment is £100k and the client is taking 3.5% regulars withdrawals and you are taking 0.5%, both based on the premium paid, you’d input £4k in the withdrawal column.

For fund based OAC, you would need a withdrawal history from the bond provider to ensure that your inputs are accurate.

Q. Does the adviser initial fee have to be taken account off in calculating the TDA?

A. It depends.  The TDA is based on investment premium. For example, if the client transfers £100k to the bond provider and the initial adviser fee is 1% and it is paid prior to investment, the TDA will be based on the £99k premium.  Alternatively, if the provider invested the total amount the TDA would be based on £100,000 but the £1,000 charge would use up the TDA.

We do the former method.

Q. Are there ways of making the ongoing advice fee not part of the 5% if it comes directly from the DFM portfolio instead of the bond?

A. No, the fee for advice to the client must always come out of the tax deferred allowance.  Only investment services provided to the bond provider can be excluded.

Q. Just a follow up on the DFM fees - if investment management and adviser (wealth planning fees) are bundled together does that cause an issue?

A. Yes, advice fees to the client need to be taxed as a withdrawal so use the 5% TDA.

Q. Re ongoing adviser fees, some platforms allow the GIA/CIA to pay the charges so they are not taken from the bond and do not form part of the 5% allowance.

A. That’s because the amount is not coming from the bond. If any amount for advice comes from the bond it must use the TDA if it is for advice to the bond owner.

Q. Ongoing adviser charges are treated as a withdrawal. This applies to post RDR policies and commission paid on pre-RDR policies doesn't count as a withdrawal?

A. Correct. Trail commission on pre-RDR policies doesn’t use tax deferred allowance. The key change at RDR was the “commission” contract changed from one between the provider and the adviser to one between the client and the adviser. That’s why they became withdrawals as it is effectively the client paying their bills from their investment.

Q. Is it still the case that the ongoing adviser fees are included within the 5% allowance?

A. Correct.

Q. I believe that all ongoing adviser fees paid via investment need to be considered when calculating amount of tax deferred availability?

A. Correct. Ongoing adviser charges are essentially a withdrawal by the client to meet the cost of advice.

Q. If you top up an old bond that is paying fund based commission do you still get it on the new total amount?

A. No, it is not possible to increase trail commission on pre-RDR bonds.

Q. If the Adviser charge is fund based within the Bond then this would not impact the 5% withdrawal?

A. It doesn’t matter if it’s premium based or fund based, it will use tax deferred allowance (TDA).

The key point with fund based is that if the fund value is increasing, then more TDA is being used as the TDA is based on the premium, not the fund value. As such you need to be careful if the client is taking a regular withdrawal themselves. For example, if the client is taking 4.5% of the original premium, setting up a 0.5% adviser charge based on fund value could lead to the TDA being breached and triggering an excess event gain. Although it will be a small excess gain, in some circumstances it might lead to a small tax liability and tax reporting requirements.

Q. The example seems to indicate that the full segment timing is in the earlier tax year compared to a partial withdrawal across all segments is that so?

A. It depends. A full surrender gain (which includes individual segments) always arises in the tax year the surrender takes place.

Excess events (withdrawals in excess of the tax deferred allowance (TDA)) happen at the end of the policy year. For example, if the bond started on the 1^st of April and a withdrawal is taken in excess of the 5% TDA on 19 February 2025 the excess event will happen on 31 March 2025 i.e. the same tax year of the withdrawal. However, if the bond started on 1^st of June, the excess event would occur in the tax year after the withdrawal was made i.e. 31 May 2025 (2025/26 tax year).

Q. If a large withdrawal is taken from an Offshore Bond, how is it affected by the TDA? Is it better to surrender segments in Offshore Bonds?

A. The calculation of gains for withdrawals in excess of the TDA or segment surrenders is the same for onshore and offshore bonds.

Excess gains (above the TDA) can create artificially high gains so you do need to be careful. However, which option is better will depend on the size of the gain created by each option and the tax circumstances of the client in the tax year the gain will be assessed.

A higher gain doesn’t always necessarily mean a tax liability will occur. It’s a case of assessing each option. Sometimes a combination of segment surrenders and a partial might be the best option.

We have a Partial vs Full article on our Tech Matters site which you should find helpful.

We also have a Bond Gain Tool which you can use to model the potential gains of each withdrawal method and Tax Relief Modeller Tool which you can then use to assess the potential tax impact of the gains that would be created by each withdrawal method.

Q. Sometimes Its horses for courses when it comes to partial across all or full segment surrenders but can you touch on the benefits and drawbacks for both please?

A. Yes, it can be horses for courses as whether the gain arising from each withdrawal method might not cause a tax liability regardless. It ultimately depends on the clients circumstances.

What I would say is that surrendering segments will mean a lower tax deferred allowance (TDA) going forward as that will be based on the remaining segments only. Therefore would it be better to retain future TDA accrual on all the segments for use in the future? For example, is it possible they might become a higher rate taxpayer for a period and might want withdrawals without triggering a chargeable event and then look to crystallise gains in the future if they are no longer higher rate?

A larger gain might occur with an excess gain, particularly in the early years of a bond. However, although it might not result in further tax to pay (e.g. onshore gain still within basic rate band), it might still create a requirement for self-assessment. If you have savings income of more than £10k, you need to self-assess even if no tax is payable (see my Who Has to Self-Assess video in our Tax Year End Hub). Therefore if an excess gain would trigger the needs to self-assess but a smaller gain on segment surrender wouldn’t, the segment route would be better if they don’t want to self-assess.

Q. In the last case study, was there no CGT to pay because "John" had at least £1,000 unused CGT allowance for each of the last 9 years?

A. John had pension income of £40,000 only and an onshore bond gain of £9,000.

When you add the gain to his pension income, the first £1,000 of the gain is taxed at 0% as he has £1,000 of personal savings allowance available. The remaining £8,000 is taxed at 20% (£1,600) but he gets a 20% tax credit of £1,600 so he has no further tax to pay.

Top-slicing relief where you effectively get to tax the slice for the number of full years the bond has been in force is not relevant in this scenario as the full gain doesn’t push John into the higher rate band.

I wouldn’t use the abbreviation CGT in respect of bond gains (subject to income tax) as it’s likely to cause confusion with it’s normal use for capital gains tax.

Q. The onshore bond withdrawal tool asks if the w/d is across all segments or full segment surrender. How do we note if the 5% allowance is to be used or not?

A. Tax deferred allowance (TDA) usage is a by-product of the withdrawal method. Any withdrawals taken as a partial withdrawal across all existing segments will use TDA. The calculation of a gain for segment surrenders (which I’ll cover in the next session) don’t reference the TDA. However, if you surrender segments, it does mean less TDA going forward for the policyholder(s) as the TDA available will be based on the remaining segments only i.e. if the bond was set up with 100 segments and 20 are surrendered, the TDA will be based on premiums paid on the remaining 80.

In respect of tools, I think you are referring PruAdviser website tool which you can use to determine the potential gain that might occur if taking a withdrawal from an existing onshore Prudential bond. Assuming this is the case, if you want to utilise TDA on existing segments, you would select the withdrawal across segments option. You would select segment surrender if you don’t want the gain to be calculated in reference to the TDA. Although is some circumstances you may want to do a combination of segment surrender and a partial across remaining segments.

What you should keep in mind is that the Pruadviser tool provides a snapshot in time based on the current position of the bond and the proposed withdrawal. It doesn’t look forward. For example, if there’s an existing withdrawal instruction that is to remain in place after the proposed withdrawal, this could have an impact on the total amount of TDA usage and in some circumstances the excess gain might be higher than illustrated. If you want to look beyond a particular withdrawal and the impact of continuing withdrawals, then you should find my teams Bond Gain Tool more helpful from a planning perspective.

Q. What scenarios would a retired expat returning to the UK be better off with an onshore bond than an offshore bond set up while overseas?

A. Most UK bond providers will not accept an application from a non-UK resident investor. This is also the case with offshore bond providers standard offshore bond proposition i.e. the product designed for UK resident investors and administered in line with UK chargeable event legislation.

Some offshore bond providers do offer bonds which are compliant with the tax and regulatory environment in non-UK jurisdictions they operate in. For example, Prudential International also operate in Cyprus, France, Gibraltar, Malta, Spain, Guernsey, Isle of Man and Jersey. However, to apply for these products, the investor must be resident in that jurisdiction. The adviser must also be authorised by the relevant regulator to provide advice in that jurisdiction.

These products are not administered in line with UK chargeable event legislation and how bonds are taxed overseas can be significantly different from how they are taxed in the UK. For example, it’s not uncommon for investment returns to be taxed annually in foreign jurisdictions, unlike in the UK, where a tax event only arises when a chargeable event occurs.

I’m afraid that we only cover UK taxation so we would be unable to comment on overseas taxation and the tax impact while living abroad needs to be considered in the round to understand the overall net benefit. Such a client would require cross-border tax advice and we would expect their financial adviser to regulated in the country they are living in when the advice is given.  

Q. Would an investment into a physical gold ETF/ETC make an offshore bond 'personalised' and what does that mean?

A. Yes, we believe it would (and being able to do so is unlikely with a standard offshore bond). There is some information in section Offshore bond taxation explained article. More detailed guidance can found section 7705 of HMRCs  Insurance Policyholder Taxation Manual.

Q. If a full equity portfolio is being used i.e. 100% dividends, is there any benefit using an offshore bond for gross roll-up - given no tax onshore in this case?

A. We’ve considered a number of permutations of client scenarios and don’t believe there could be a scenario where an offshore bond would deliver a better than an onshore bond if the return on the underlying investments held in either bond was 100% equity based.

Q. Can you clarify if indexation relief still applies within onshore bond wrapper for capital gains?

A. Yes it does. When the fund makes a capital gain on certain long term assets, then indexation allowance may apply up to December 2017. Indexation allowance strips out inflationary aspects of the gain and also helps drive down the effective rate below 20%.

QIs there any way to show clients the internal taxation of onshore bonds?

A. Our Tax Wrapper Comparison Tool can provide an indication. The tool is designed for use by financial advisers and paraplanners so you would need to check with your own compliance team about sharing the output with your clients.

Q. If you’re getting a 20% tax credit on onshore with tax likely less internally, why would you use offshore?

A. You wouldn’t if the investor is always likely to be at least a basic rate taxpayer or higher.

Let’s consider the examples in today’s session of £6,000 of growth for onshore and offshore with £600k and £0 tax paid “internally” in the onshore and offshore bond respectively. If both bonds are surrendered the gains would be £5,600 and £6,000 for onshore and offshore respectively.

Let’s assume the investor has £40,000 salary and £1,000 other savings income for the tax year (so no personal savings allowance). The £5,400 onshore gain would be taxed at 20% but this is covered by the basic rate tax credit of £1,080 so no further tax to pay a they net £5,400. However, if it was a £6,000 offshore bond the investor would incur a £1,200 tax liability and net £4,800.

You would use offshore if the investor will be a non-taxpayer with the ability to crystallise gains within available starting rate for savings, personal savings allowance and personal allowance. For example, an investor with no income at all would net £5,400 or £6,000 from the onshore and offshore bond respectively.

Q. What would you say are downsides of offshore v onshore as i know some advisors that only use them for all cases?

A. I think the answer to the above question helps answer this question.

As a basic rule of thumb, onshore bonds would be the preferred route where the investor is likely to be a basic rate taxpayer or higher when realising the gain. This is because it’s likely the effective rate of tax paid during the journey will be less than 20% but they will still get a 20% tax credit. On the other hand, offshore bonds will provide a higher net benefit, if the investor has little or no income and can realise a gain that will be within their available starting rate for savings, personal savings allowance and personal allowance.

Q. Or a 21-year onshore bond with £100K invested, where the client withdrew 5% annually, how is the £5K taxed for a basic rate taxpayer?

A. The next £5,000 would be an excess event and the £5,000 added to the tax return, if they were a basic rate taxpayer then there would be no tax as the tax credit would cover the liability

Q. Can you tell me how the withdrawals works with savings allowances?

A. Bond gains, either through full segment surrender or partial withdrawals, are savings income so get 0% tax within those allowances.

Q. If a client has to pay income tax on an onshore bond upon full encashment for example, can this income tax be used to claim gift aid for the client?

A. The tax generated by a bond gain is allowable for gift aid.

Q. Please explain how the 5% TDA applies within the loan trust and discretionary gift trust. Thank you! For example, for the loan trust, how will withdrawals apply in practice. And for DGT, is the annuity calculation paid via the 5% allowance?

A. The TDA works the same whether the bond is in trust or not and regardless of the type of trust. It can therefore be used by trustees, in the same way as individuals, to meet withdrawal requirements.

In respect of a DGT, a regular withdrawal across segments is the standard withdrawal instruction used. It therefore uses TDA. The TDA has no relevance to the discount calculation for a DGT.

With a Loan Trust the trustees can use the TDA, segment surrenders or a combination of both to meet loan repayments to the settlor(s) or trust fund distributions to trust beneficiaries. You should find my recent Professional Paraplanner article helpful on how the trustees of a loan trust use the bond to meet loan repayments (or trust fund distributions) and how they update their trustee records afterwards.

Q. Is there any Prudential guidance on entry, exit and periodic charges?

A. Yes, in our Discretionary Trust Taxation article. You should also find my colleague Neil Macleod’s Professional Adviser article from the end of 2024 helpful.

Q. Could the trustees of the loan trust surrender full segment to repay some loan to the settlor?

A. Yes they can. You should find my recent Professional Paraplanner article helpful on how the trustees of a loan trust use the bond to meet loan repayments (or trust fund distributions) and how they update their trustee records afterwards.

Q. I’m sure that previously, top ups were treated by HMRC as having been made at the same time as the initial investment!

A. It has never been the case in respect of the tax deferred allowance (introduced by the Finance Act 1975) it has always been based on the aggregate of an annual ‘allowance’ of 5% of premiums paid, on a rolling basis.

You might be thinking of the Finance Act 2013 (FA13) which brought in updates to the chargeable events legislation in respect of time apportionment relief (TAR) to include onshore policies as well as offshore? Essentially, TAR was extended to policies issued by UK insurers on or after 6 April 2013 and to existing policies issued by UK insurers which are modified on or after that date. FA 2013 amended Section 536 (2) ITTOIA 2005 which  is a section dealing with top slicing rules. Under TAR, the chargeable gain may be reduced for tax purposes if the beneficial owner was not UK resident throughout the policy period. TAR applies by virtue of S528 ITTOIA 2005.

I’m not aware of any other HMRC matters with a link to the original and top-up premiums.

If it’s not the FA13 changes, I suspect what you might be thinking about is pre-RDR bonds that had an initial charge period. In such a scenario, the bond provider (nothing to do with HMRC) would sometimes consider the date of the original investment (not top-up premiums) when considering the application of an early cash-in charge being applied.

Q. There used to be some providers that treated top ups as having been made at the same time as the initial investment is that no longer the case?

A. Please refer to the above response.

Q. I thought this was aimed at those who want to understand bonds, I am completely lost! This is very technical

A. Sorry – we tried to pitch it at an appropriate level.

Q. If investing as corporate bond is it not the case that any profit is not subject to tax as assumed corporation tax already paid within bond?

A. It depends on company circumstances. You can read about the taxation of corporate held bonds here.

Q. Bond funds are generally ignored for care assessments (when historic) if adding more funds to a bond wrapper now, would you top up existing, or set up a new?

A. The decision should be based on normal planning considerations. A few examples would be:

• Charging structure of new bond vs existing bond, including fund size discounts.
• Would being able to top-slice the gain on the top-up to inception of original bond be beneficial from a tax planning perspective?
• Is the life assured basis on existing bond aligned to tax planning objectives>
• Is there sufficient segments in existing bond to meet tax planning objectives or would it be beneficial to create more segments with a ne  bond?

Long-term care (LTC) should not be a factor in making a decision, because by definition that is deliberate deprivation of assets. Obviously the client’s circumstances at the time should be considered and if it’s not unreasonable to foresee the need for LTC in near future then it would be prudent to assume that any new investment will be brought into account in the financial assessment. That should not disturb the original bond funds being disregarded where appropriate. However, if it’s topped-up, it will become difficult to differentiate between the original premium and top-up as the original segments will simply being increased. And while you can specify a withdrawal from a specific fund, if the top-up is not into a separate fund, you can target different investment tranches. Therefore if the client needs to use the top-up money to fund some of their care costs it will become problematic from a chargeable event point of view. As such, it would be probably be cleaner from an administration and tax perspective to set up a new bond.

Q. You mentioned topping up the bond. Would it be better to just set up a new bond with the new portion of funds and having two separate bonds? 

A. Please see the previous answer but ignore the long-term care comments.

Q. Who is best point of contact to check some technical understanding?

A. Please speak to you usual M&G contact who can arrange for technical questions to be directed to our team or arrange a call if you would like to discuss a technical query.

Q. Can we get a link to use the tax wrapper comparison tool?

A. Here is the link to our Tax Wrapper Comparison Tool.

Q. Is there to plan increase the number of years that can be analysed (more than 10yrs) in the comparison tool?

A. We have no plans at present but keep it under review.

Q. Is there a tool to identify which bond wrapper to use at inception from a taxation angle. Example Higher rate now but basic at end of term or retirement?

A. Our Tax Wrapper Comparison Tool can do this but only based on a 5-10 year investment term.

Q. Where can I watch a recording of today’s session (or a previous session), obtain CPD and see answers to the Q&A?

A. We have a Bond School section on our Tech Matters site where you can watch a recording of each of the Bond School sessions, obtain CPD and read the answers to the questions raised.

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