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Autumn 2003 Newsletter

Cashing in your chips

If you have a single premium insurance bond, often invested in unit trusts, the tax treatment of a profit when you cash the policy is unusual. It isn't charged to CGT - as a direct investment in unit trusts would be - but rather to the higher rate of income tax. At the moment, that means the difference between the top rate of 40% and the basic rate of 22%. If the bond is with an offshore company, you just pay 40%. It's not the whole payout that is taxed - only the gain you have made over the amount invested.

From 6 April 2004, the charge will go up slightly - it will be the difference between 40% and the savings rate, 20%. That's not a huge difference, but if you are thinking of cashing in a policy around March or April next year, it's a factor to take into account.

There are a number of ways of avoiding the charge altogether. If you are not a higher rate taxpayer in the year in which you cash it in, you don't pay anything - so it wouldn't matter whether it was 18%, 20% or 50%, it wouldn't apply to you. You may also be able to achieve the same result if you are a higher rate taxpayer but your spouse isn't.

If you want to know more about the tax treatment of these investments, we will be happy to advise you.

The change to the tax treatment of life insurance gains is in s.173 and Sch 35 FA 2003.