Q. Is it true that people living in Scotland are going to pay less income tax? I thought they had voted to stay in the UK.
A. Although you are obviously correct that the Scottish referendum confirmed Scotland’s place in the United Kingdom, the answer to your question is “maybe”. From April next year the Scottish Rate of Income Tax (SRIT) comes into force, as a result of powers devolved in the Scotland Act 2012. The basic, higher and additional non-savings income tax rates of those resident in Scotland will all be reduced by 10%, with the SRIT payable in addition. The level of the SRIT is due to be announced in the autumn, which often means December in the world of government announcements. So if the SRIT is announced at 10% anyone living in Scotland will pay the same in total, and no-one will pay much attention. HMRC has done some research which shows very low levels of awareness among Scottish taxpayers about the potential change. However if it is anything other than 10%, and therefore going to make a difference to people then I suspect word will spread pretty quickly!
Q. I have an investment bond which I have held for 15 years, and I have been advised that the chargeable gain if I surrender it is £120,000. My adviser tells me that although my income is £30,000, there will be no further tax to pay on the gain due to “top-slicing” relief. Is this correct?
A. Yes, and no! The investments within a UK-based or “onshore” investment bond are taxed at source, and this tax satisfies basic rate tax, although higher rate taxpayers must pay the difference between basic rate and higher rate, a further 20% of the chargeable gain (profit). A higher rate taxpayer must therefore pay a further £24,000 to satisfy the higher rate tax. Top-slicing relief recognises the 15 years over which the gain has accrued, and that for basic rate taxpayers it could be considered unfair that all the profit is added to income in one year. The top-sliced gain is the total gain divided by the total years the plan has been held, or £8,000. Adding this to your other income of £30,000 for the year is still within the point at which higher rate tax kicks in of £42,385. However where the adviser is wrong is that when your total income exceeds £100,000, you lose £1 of your personal allowance of £10,600 for every £2 of income. In this case, you would have income of £30,000 + £120,000, meaning you lose your entire personal allowance if you fully surrender the bond. This means that for you, higher rate tax starts at £31,785, and only £1,785 or 22.3% of the top-spliced gain falls into the basic rate band. 77.7% of the gain is therefore subject to the higher rate tax charge. This results in a tax charge of over £18,500. If you spread the surrender over two tax years, it is likely this could be reduced to zero, as you could retain your full personal allowance in both years. It is essential that you take advice from a properly qualified adviser before surrendering investment bonds, either in full or partially, as it is often possible to create unnecessary (and presumably unwanted) tax liabilities if the wrong route is followed. I would recommend consulting a chartered financial planner as the cost is likely to be far outweighed by the tax saving, and if the adviser gets it wrong, they will be liable for their advice.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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