Deficiency Relief

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burg
burg Registered, Moderator Posts: 1,441 mod
OK so it just seems to be one of those days. Everything I loom at sorting leads to more complications.

Not sure what advice I can get on this. I'm currently doing some reading of

http://www.hmrc.gov.uk/drafts/tacklingavoidance.htm
http://www.hmrc.gov.uk/manuals/iptm/iptm3860.htm
http://www.hmrc.gov.uk/manuals/iptm/IPTM3510.htm

History

Client invested £75k in an investment bond in Jan 2001.
They took out a part withdrawal of £87k in Jan 08 leading to a gain of £60750. Being £75k x 5% = £3750 x 7 years = £26250 so £87000 - 26250 = 60750 gain
As the client ended up being a higher rate tax payer there was tax to pay after top-clicing relief.

Come Jan 11 the bond is cashed in full for £11k.

The total gain on the policy is therefore £87k + £11k = £98k - £75k = £23k

Deficiency Relief as I understand is there to be able to relieve part of the difference between the higher gain taxed and the actual finalised gain.

Does anyone have experience of this and can confirm the working of CDR?

I'm off to do some reading and try out some calculations?
Regards,

Burg

Comments

  • burg
    burg Registered, Moderator Posts: 1,441 mod
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    Think I've sorted this. If anyone is interested I will post my calculations later on
    Regards,

    Burg
  • deanshepherd
    deanshepherd Registered Posts: 1,809 Beyond epic contributor 🧙‍♂️
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    I think you need to start taking on simpler clients!!
  • burg
    burg Registered, Moderator Posts: 1,441 mod
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    Thanks for the advice Dean!
    Regards,

    Burg
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    burg wrote: »
    Think I've sorted this. If anyone is interested I will post my calculations later on

    Would be interesting to know your final calculations!
  • burg
    burg Registered, Moderator Posts: 1,441 mod
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    PDR - hope this helps - has been confirmed by my tax helpline from Taxwise

    Part surrender calculation

    Withdrawn £87,000
    Allowable withdrawals £26,250 (£75,000 x 5% = £3,750 x 7 years)

    Chargeable gain £60,750

    Tax due after notional tax and Top Slicing Relief and PAYE – c£5,700

    Final full surrender

    Total Benefits £98,634.40 (£11634.40 £87,000) Total deductions (£75,000.00) Previous gains (£60,750.00)

    Amount of deficiency (£37,115.60)


    This effectively extends the basic rate band by £37,115.60 to £74,515 so if the total income was below higher rate anyway then there is no tax effect.

    Therefore had she received advice before withdrawing and had the further c£5k from the policy to make it a full withdrawal the tax bill would have been reduced significantly as the gain would have been the actual gain of c£92k (being £87k 5k) - £75k = £17k. From my calculations when you look at TSR and the notional tax on this the liability would have been around £2 so therefore she has effectively lost c£5,600.

    So had I been acting for the client at the time they were looking at withdrawing the money I would have advised to withdraw all funds.
    Regards,

    Burg
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