Insurance Bonds, Lived Overseas and Time Apportionment Relief

Refresher - What is an Insurance Investment Bond?

A lump sum investment that has stock market, fixed interest, index linked, property and cash funds in the same way that ISAs, pensions, investment and unit trusts have has a range of fund choices.  The difference is that the lump insurance investment bond is offered by most big insurers such as Legal & General, Standard Life, Aviva, Scottish Widows, Prudential et al.  All the above investments offer similar funds it is just the ‘tax wrapper’ that makes them different.  For example, pensions offer tax relief, tax free growth, a tax free lump sum and taxable income and an ISA offers tax free growth.  Insurance Bonds are just another wrapper with different rules:

Tax Rules for Onshore Life Insurance Investment Bonds

• Gains tax is paid by the fund meaning for you, the investor, Basic Rate Tax (20%) is deemed already paid.
• You can withdraw up to 5% per annum of the original investment without creating any immediate tax liabilities.
• You can defer taking 5% pa and it rolls up.  E.g.  If make no withdrawals for 5 years or 10 years, you can withdraw up to 25% (5 x 5%) and 50% (10 x 5%) of the initial investment without an immediately liability to tax.
• You can withdraw more than 5% pa but this may then be a chargeable event subject to tax.  See top slicing tax calculations below.
• If you withdraw 5% pa of the original investment each year over 20 years you have then withdrawn 100% of your original investment amount back and the remaining balance is your capital growth.
• When you start to take part of the gain as withdrawals then you may be subject to taxes as follows using Top Slicing.
• Think of Top Slicing as the ‘Profit pa’ i.e.  the gain/profit divided by the number of years the investment has been running – the “Top Slice”.
• The slice is added your income and remember 20% basic rate income tax is deemed as paid as tax is deemed paid by the insurance company fund already.
• 20% Basic Rate Taxpayer:  £1,000 top slice profit pa is added to income, if this is still within basic rate tax band, there is no liability to tax on £10,000 gain as 20% Basic Rate Tax is deemed paid.
• 40% Higher Rate Taxpayer: £1,000 top slice profit pa is added to income, if this is above the basic rate tax band, there is a tax liability to tax on £10,000 gain at 20% marginal rate (as 20% Basic Rate Tax is deemed paid).
• 45% Higher Rate Taxpayer: £1,000 top slice profit pa is added to income, if this is above the higher rate tax band, there is a tax liability to tax on £10,000 gain at 25% marginal rate (as 20% Basic Rate Tax is deemed paid).
• Note:  if any of the top slice profit pa is spread over two tax bands then any taxes payable will be in proportion to the amount of gain in that band.
• Offshore bonds have similar treatment but as they grow tax free, tax on gains is charged at 20%, 40% and 45% depending upon your tax band position.

See Videos:  Insurance Bonds and Bond Top Slicing and Onshore v Offshore

The above taxation rules apply to UK residents but ….  What happens if you move overseas permanently or spend some time overseas before returning to the UK?

Non-Resident - Move Overseas Permanently

If you leave the UK are tax resident overseas and you fully or partially cash in the bond, UK top slicing relief and taxation of chargeable gains does not apply to your UK Onshore Bond or Offshore Bond.  You are subject to taxation in the country that you live.

Lived Overseas but Returned to UK - Time Apportionment Relief (TAR)

If you have lived overseas for a period whilst you were invested in an Offshore Bond (and now Onshore Bonds from 6^th April 2013), you are usually entitled to claim TAR when a chargeable event (potential tax liability is created) when fully or partially encash the insurance investment bond. 

• Time apportionment relief will be available for the period of non-UK residence.
• The gain is reduced in proportion to time spent overseas versus time in the UK (both before you left and after your return).
• TAR may also reduce the number of years used in the ‘top slicing’ (profit/gain pa calculation).
• If you assign ownership of the bond to another, taxation is based upon the tax residency position of the owner at the time the bond is fully/partially encashed.

As mentioned earlier, if you were not UK resident at the time and fully or partially encashed a bond that created a chargeable gain whilst you were living overseas, you are not subject to UK taxation but local taxation at the time and will only pay tax on chargeable gains (full or partial encashment) that occur after you have returned to the UK but if you are deemed ‘temporarily’ overseas resident things are different:

Only Lived Temporarily Overseas:

If you return to the UK and are deemed to have only lived temporarily overseas, tax may still be payable immediately in the tax year of your return for the chargeable gain event whilst you were overseas:

• Bond was taken out when in UK i.e., before the period of non-residence (which most Onshore Bonds were),
• So, this is a ‘catch all’ for onshore bonds but not so for Offshore Bonds taken out when you were living overseas
• Bond owner was resident in the UK at least 4 of the last 7 tax years becomes UK resident again within five years of leaving.

Example Calculation of Time Apportionment Relief

• Dave invested £100,000 in an onshore bond on /04/2005.
• He left the UK to become overseas resident on 06/04/2020
• He fully cashed in the bond whilst overseas 06/04/2023 for £200,000. 
• This is a gain of £100,000 and chargeable event in UK but as Dave was tax resident overseas, there was no tax payable in the UK but may have been taxable where Dave was living.
• Dave then returns to the UK a year later on 06/04/2024.
• Dave was overseas for 4 years.  Therefore, he has returned within 5 years of leaving the UK and is deemed to have only been ‘temporarily overseas’.
• This means UK tax on the chargeable gain made the previous year is payable in the tax year of return 2024/25.

The Calculation

• Total years owning the bond 18 years.
• Time spent overseas when owning the bond: 4 years (1,460 days).
• Time spent in UK whilst owning the bond: 14 years (5,110 days).
• Time Apportionment Relief (reduction on gain)
• Total Gain £100,000 X 1,460 days/5,110 days = £28,571 time apportioned overseas gain.
• Time Apportioned UK Chargeable Gain = Total Gain £100,000 less £28,571 = £71,429.
• Top Slice (gain per annum) = £71,429/14 years = £5,102 Top Slice.
• Add the £5,102 Top Slice to your UK income for tax year 2024/25.
• If the £5,103 top slice is still within Dave’s basic rate tax band (20%), then the whole £71,429 (time apportioned gain) is taxed at 0% as basic rate tax is deemed paid for onshore bonds.
• If the £5,103 top slice is all in Dave’s higher rate tax band (40%), then the whole £71,429 (time apportioned gain)  is taxed at 20% as basic rate tax is deemed paid for onshore bonds so it is just the difference.
• If the £5,103 top slice is all in Dave’s additional rate tax band (45%), then the whole £71,429 (time apportioned gain) is taxed at 25% as basic rate tax is deemed paid for onshore bonds so it is just the difference.
• If the top slice straddles different tax bands, then tax will be paid on the whole gain in proportion of the top slice in each tax band.
• Remember, of the £100,000 total gain, £28,571 is not taxable in UK under time apportionment relief, and chargeable gain £71,429 is taxable at either 0%.20% or 25% above.

Contact  Call Back  Calculators  Our Fees