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Calculation of chargeable events gains on bonds: Q&A

Author Image The Technical Team
3 minutes read
Last updated on 6th Apr 2019

Overview

Questions from advisers answered on types of chargeable event gains for bonds and how to calculate them.

What is a chargeable event?

Q: What is a chargeable event?

A: A ‘Chargeable Event’ happens when certain events occur or money is taken out of a bond. A calculation is done to see if a Chargeable Event Gain arises. There will only be tax consequences if there is a Chargeable Event Gain.

Type of Tax Liable

Q: What are the tax consequences of a chargeable event gain on a bond?

A: If there is a Chargeable Event Gain then there may be Income Tax due.

Events causing Chargeable Event Gain

Q: What events cause a Chargeable Event Gain?

A: Types of ‘Event’ causing a Chargeable Event Gain are:

  • Death of the life assured (or last to die of lives assured) where benefits are payable
  • Assignment (full or in part) for money or money’s worth
  • Maturity of the policy
  • Partial or regular withdrawals across a whole bond, in Excess of the 5% tax deferred allowance
  • Surrender of the bond, whether in full or surrender of clusters

Types of Chargeable Event Gains and when they are reported

Q: How do you know if chargeable event gain has arisen?

A: Well, firstly you need to determine the circumstances causing the Chargeable Event.  The type of event will determine the type of Chargeable Event Gain calculation required and, indeed, when the Chargeable Event Gain takes place. There are generally two types of Chargeable Event Gain calculation:

  • Final Chargeable Event Gain
  • Excess Chargeable Event Gain 

Q: What’s the difference between a final gain and an excess gain? 

A: A Final Chargeable Event, as the name suggests, takes place when the bond, or segments of the bond, end. Events such as surrender, in full or segments, death of the life assured giving rise to benefits and maturity are all Final Chargeable Events. 

An Excess Chargeable Event happens when withdrawals are made above a certain limit, but the bond continues with all the clusters/segments intact. Events such as part assignments for money or monies worth and regular or partial withdrawals in excess of the 5% tax deferred allowance are all Excess Chargeable Events. 

Q: Why is the excess gain so high when the bond has not made any profit?

A: Chargeable Event legislation states that where withdrawals in the policy year exceed cumulative 5% allowances then a chargeable event gain will arise. It is important to remember that this bears no correlation to the economic performance of the bond. 

Q: When is a gain calculation done? 

A: A Final Chargeable Event Gain is calculated immediately.

An Excess Chargeable Event Gain calculation is done at the end of the policy year    

Formula/calculation to use

Q: Is the chargeable event gain calculation the same for a final and excess gain? 

A: No, there are specific formulas for each type 

What is the formula for a final gain?

For full surrender and surrender of clusters you calculate it as follows:

 

Surrender value

Plus

 

Previous withdrawal (sum of regular and partial withdrawals)

Less

 

Investments in (sum of premiums paid)

Less

 

Previous excess chargeable event gains

Equals

 

Final chargeable event gain

If you are dealing with a surrender of clusters, you need to remember to proportion the figures to the number of clusters being encashed. 

What is the formula for an excess gain?

For regular withdrawals and partial withdrawal over the clusters, it is:

 

Amount withdrawn over the policy year

Compare to

Available 5% tax deferred allowance

Equals

Excess Chargeable Event Gain

 

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