dividends and bond holders

  • mr lynton
  • 27/10/08 31/05/09
  • a depositor
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Posted: Wed, 26/08/2009 - 10:56

Does anyone know if bond holders will be allowed to withdraw the full value of any dividends paid to their bonds or not?
I am awaiting direction from Prudential ( who are intending to deduct their full charges from any withdrawals) but they have provided very little meaningful info.
You can only normally withdraw 5% from a bond in any tax year but hopefully this is not the case if most of our bonds would have matured by now and surely there is no tax liability if we are only claiming back parts of our original capital invested.
anyones thoughts appreciated.

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Bonds

  • investor01
  • 13/10/08 n/a (free)
  • a depositor
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  • Wed, 26/08/2009 - 13:15

Hi mr lynton,

I don't have a definitive (i.e. from the horses mouth) response but as far as I'm aware the 5% means that the tax man is not involved but anything above that, then it becomes taxable. However, as you rightly say you would be withdrawing the capital from your investment (investment! huh!) as this is all the dividend is and there should be no tax liability from doing so.

If your bond is like mine then the parasitic life company may continue to take charges for the sum you withdraw, depending on whether your charges were front-loaded or not.


Bands and Tax

  • sounfair
  • 29/01/09 31/05/09
  • a depositor
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  • Wed, 26/08/2009 - 16:48

It's a little more complicated than that, but you will have to remember that the offshore bond wrapper is the taxable investment (not the underlying deposit account).

The 5% withdrawal allowance is only applicable to UK investors (i.e. it is HMRC legislation) and it is possible to casue an income tax liability against a capital loss if any withdrawal isn't carried out in the correct manner.

For example if someone had invested £100,000 on 1st April 2008 they have an annual tax deferred allowance of £5,000 per policy year (now in 2nd policy year) which is cumulative and so up to £10,000 before 31st March 2010.

Assuming the first dividend from PWC is £25,000 (for ease of maths) if this were simply withdrawn, this is in excess of the cumulative allowance and the excess of £15,000 would be taxable at their highest marginal rate of tax - £6,000 tax for a higher rate taxpayer (even though there is currently a notional investment loss of £75,000).

THIS IS NOT CLEVER!!!

Seek advice!!!!


bonds and tax

  • mr lynton
  • 27/10/08 31/05/09
  • a depositor
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  • Thu, 27/08/2009 - 06:05

i understand what you say but my bond was a 13 month duration bond that started on 1st jan 2007- therefore surely i could have withdrawn the capital plus interest on its anniversary (and paid tax on the interest) if i had so desired or transferred the capital to another bond?
I thought the 5% rule was a percentage allowed each year for 20 years by HMRC before tax is applied for the full amount left at that point ie tax deferral for that period.
Surely tax can only be applied at this point to any profits accrued on the original capital?
The problem i see is life companies potentially making redemption charges on withdrawals from the bonds- these parasites will take whatever they can and have shown no sympathy for our plight upto now


Tax

  • sounfair
  • 29/01/09 31/05/09
  • a depositor
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  • Thu, 27/08/2009 - 07:03

Hi

I assume you are talking about your KSF fixed rate band when you say it had a 13 month term, and that this is held within an offshore bodn wrapper (via an insurance company)?

If this is the case, it is the bond wrapper that is the taxable entity and not the underlying deposit account.

So, irrespective of the duration of the fixed term deposit, tax is calculated with reference to withdrawals from the bond and how they occur.

If you were able to encash the whole bond wrapper - tax would be calculated on the gain (i.e. profit after charges), but at the moment you cannot cash in the whole bond wrapper because you need to wait for PWC to complete the liquidation.

Therefore, any withdrawal you take will be a partial encashment of the bond wrapper and this can be done in two ways.

The first is as I previously outlined, i.e. where an encashment is taken across the whole bond wrapper, so potentially you could have a tax liability even though the bond is showing a loss at present.

The second is to encash whole policy segments, which most bond wrappers are split into. This then works like a full encashment of a number of policies, and tax is payable on the gain/profit. The problem I see here is that it will be dificult for the insurance company to allocate the dividend from PWC to specific segments, they're more likely to allocate them across all segments and then you're back to my original post.

You're second paragraph isn't quite correct. The 5% allowance allows you to make 5% withdrawals without causing an immediate tax charge, but these 5% aren't removed from any future tax calulations.

The formula is actually:

Surrender proceeds (on encashment) + Previous Withdrawals (5%'s) - Cost (investment) = Gain

I could be getting confused with what you are saying with reference to "bond", so the above applies if you mean the offshore bond wrapper issued by an insurance company and NOT a fixed term bond (deposit) held within this wrapper.

Hope this helps, but any further queries feel free...


tax and bonds

  • mr lynton
  • 27/10/08 31/05/09
  • a depositor
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  • Thu, 27/08/2009 - 13:37

Hi sounfair,
thanks for your help over this problem. In order to claim the EPS 2 10K I had to encash a whole policy segment (mine is split into lots of 10k segments) so i think your second option is the likely one.


That's good news

  • sounfair
  • 29/01/09 31/05/09
  • a depositor
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  • Thu, 27/08/2009 - 17:30

Hi Mr Lynton

It appears then that your offshore bond provider is able to allocate the monies received to specific policy segments and I would imagine that if they were able to do this with regard to the EPS 2, they will be able to do it with regard to the pending dividend.

On the basis that you are able to encash/surrender individual policy segments, which have been allocated with received payments, then the situation would be that only the gain/profit is potentially taxable, i.e.

proceeds from segments encashed - cost of segments = gain

I think you said that you;d had the offshore bond wrapper only a little over a year so top-slicing won't be of any use (as this is based on completed policy years), but at least on teh basis that you describe you will only pay tax on the gain.

I would urge you to check and double-check with the insurance company that this is the case and make sure that any encashment is done by encashing full segments as opose to across all segments for the reasons outlined in my earlier posts...

Regards

sounfair