Cathy Russell, tax and estate planning consultant at Canada Life, explains the differences between the tax treatment of onshore and offshore gains.
When you encash an investment bond, any chargeable gain is potentially liable to income tax. For an individual, chargeable event gains are included in their total income and this can affect entitlement to personal allowances, age-related allowances and tax credits.
Top-slicing relief can be used when working out any liability to higher or additional rates of tax, but is not used when calculating allowances or tax credits.
Firstly, let’s consider the order in which an individual’s income and gains are taxed:
Spot the difference
- Earned income
- Savings income
- Chargeable event gains
- Capital gains tax (CGT)
Secondly, let us look at the income tax bands for the current tax year (2012/2013):
* Basic personal allowance will reduce once total income exceeds the £100,000 threshold. Age allowance will reduce down to a minimum of £8,105 once total income exceeds the £25,400 threshold. Both reduce at the rate of £1 reduction for every £2 over the threshold.
** The 10% savings rate tax band is only for savings income. If taxable earned income exceeds £2,710 then no savings rate band is available.
Onshore vs offshore
Now we can look at the difference between the tax treatment of onshore and offshore gains.
Onshore bond gains are always treated as the top slice of income, after earned income, savings income and dividends.
This is because income tax, at the basic rate, is treated as having been paid at source and, therefore, a non-taxpayer, savings rate taxpayer or basic rate taxpayer has no further liability to tax.
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