R03 Question Query

Hi guys,
Currently prepping for R03 and feel almost exam ready bar not being able to get a hang on taxation of bonds with surrender/partial withdrawals! The below question is from the current exam guide.

Jemima, an additional rate taxpayer, purchased a £100,000 onshore life assurance bond just over 6 years ago. The bond consists of 100 segments and is now valued at £160,000. She would like to realise £80,000 from the bond, either only by only partial withdrawals or only by surrenders, with minimum tax being generated at the time. How may this be achieved?
A. A partial withdrawal across all the segments of £800 per segment without any tax liability.
B. A partial withdrawal across all the segments of £800 per segment with 25% tax liability on £45,000.
C. Surrender of 50 segments resulting in a 25% tax liability on £5,000.
D. Surrender of 50 segments resulting in a 25% tax liability on £30,000.

The answer is D, but I can’t for the life of me see why we would discount/work out A-C to be incorrect. I’m presuming D is based on 50 segments meaning the initial investment equates to £50,000 therefore the gain of £30,000 would be taxable, however, unsure exactly why and if the cumulated 5% annual withdrawal allowance is not to be included?

Sick of reading the same 5 pages to try and understand within the CII textbook and scratching my head!

Thanks in advance!

Comments

  • GarethMGarethM Member
    edited March 26

    Hi cj,

    As for D, for full segment surrenders, the 5% doesn't come into it. It's always simply a case of value now less original cost.

    A proportionate withdrawal however accounts for the tax-deferred withdrawal allowance in the calculation. B is the accurate figure out of A and B. Each segment has accrued £350 in tax deferred withdrawal allowance (100 segments @ £1,000 each * 7/20 years). Across 100 segments that's £35,000. so the remaining £45,000 is taxable.

    Out of C and D, D is accurate for the reason you mention.

    Hope that helps.

  • cj001cj001 Member
    Hi Gareth

    Thanks for this, really appreciate your response. I also looked at the question again today with a fresh pair of eyes and finally worked it out after grasping the 5% allowance, which is for partial withdrawals only, wouldn’t apply to the surrender of the segments. Therefore B would be an option and possible but isn’t the correct answer given the amount that would be taxed via this route.

    Seems so logical once you understand it! Thanks again for the help.
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