Bonds now play a much bigger role in financial planning, driven by the reduced CGT exemption, higher CGT rates and frozen income tax bands and allowances. Quilter says that the choice to use the bond is the easy part – making the most of its tax efficiency depends on the decisions taken when accessing it.
Tax treatment varies according to individual circumstances and is subject to change.
Withdrawals can be made by part surrender or segment surrender, and the outcome can vary significantly. To get the best result, both methods should be considered before taking money out.
Part surrenders, using the 5% tax deferred allowance
Each policy year, 5% of the total premiums can be withdrawn by part surrender without creating an immediate tax charge. Unused allowance rolls forward, allowing larger withdrawals in later years.
A chargeable event will arise if the available allowance is exceeded – each £1 surrendered above the allowance is £1 of taxable gain. This is known as the excess gain.
This method of calculation can produce gains that bear little resemblance to the bond’s actual investment growth — and in some cases can be significantly higher.
Surrendering segments realises the ‘economic’ gain
Bonds are made up of multiple individual policy segments, each of which can be surrendered independently. The premium, surrender value and resulting gain are spread across these segments.
When segments are surrendered, the gain is calculated by considering factors such as previous withdrawals and the current surrender value to arrive at the true economic gain. It mirrors the calculation used on a full surrender, but scaled proportionately based on the number of segments surrendered.
Case studies used are fictional and for illustrative purposes only.
Example – Part surrender vs segment surrender
- Danny invested £100,000 into his onshore bond
- During policy year 5, he needs to withdraw £60,000
- No previous withdrawals
- Current surrender value: £130,000
- The bond has 1,000 policy segments
Option 1 – Part surrender
- 5% allowance per year: £5,000
- Available allowance (5 years): £25,000
- Taxable excess gain: £60,000 – £25,000 = £35,000 taxable gain
Option 2 – Segment surrender
- Gain on full bond surrender: £130,000 – £100,000 = £30,000
- Gain per segment: £30,000 / 1,000 segments = £30 per segment
- Surrender value per segment: £130,000 / 1,000 = £130 per segment
- Segments required: £60,000 / £130 = 462 whole segments
- Total gain: 462 × £30 = £13,860 taxable gain
Part surrender would add an extra £21,140 to Danny’s income, compared to segment surrender.
Does that mean segment surrenders are always better?
For larger withdrawals, a segment surrender will usually produce the lower gain – but it’s by no means a guarantee. It’s always best to calculate and compare the gain.
Quilter has a chargeable event gain calculator which will allow you to do just that.
There are other considerations which might sway the decision:
Larger gain doesn’t always mean more tax
If Danny’s income were £15,000, neither method would push him beyond the basic rate band. For an onshore bond, basic rate tax is already treated as paid, so no additional tax would be due.
Even when a gain does tip a client over the basic rate threshold, top slicing relief may reduce, or remove, any higher‑rate liability.
Large excess gains can be useful later on
When the bond (or segments of the bond) is surrendered in full, previous excess gains are brought into the calculation of the economic gain. This has the effect of reducing the final taxable gain.
Put simply, Danny could consciously use his basic rate band and the onshore bond tax credit to realise a higher excess gain now without creating a tax liability, which then reduces the gain on eventual full surrender.
Segment surrenders reduce the available 5% allowance
The bond’s premium, and therefore the 5% allowance, is spread across all segments. Fully surrendering a segment permanently removes that segment’s accumulated and future allowance.
In some cases, this loss of future allowance may outweigh the benefit of realising a lower economic gain today.
The date of the chargeable event is different
When you surrender a segment, the gain arises in the tax year of the surrender. But if you exceed the 5% allowance, the gain is assessed at the end of the bond’s policy year instead.
This timing difference can mean the gain falls into the following tax year. For some clients, that delay is helpful; others may prefer the gain to fall in the current year to make full use of their allowances.
Visit our chargeable event hub for more information and tools
Planning is key when it comes to bond surrenders. To help you, our chargeable event hub gives you access to tools to calculate the gain and the income tax liability on a bond gain. We also have a range of quick reference guides which demonstrate the calculations step by step. Visit Quilter.com/cehub.
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