When inputting an existing Investment Bond, i.e. one that was already in place at the plan start date, there are a number of additional data entry fields that may require your attention. This guide focuses on accurately reflecting the tax implications that may arise and, from a tax perspective, there are 4 options in particular that should be looked at:
- Life Fund Segments
This invites one to enter the number of segments originally purchased (Original Segments), along with the number of segments still 'in force' as at the plan start date (Current Segments).
Even if you have to make an assumption to do so, we suggest entering the number of segments within the policy, wherever possible. This gives the software the best chance of accurately capturing the tax implications that would arise from any 'excess withdrawals' that may occur, during the course of the plan. Leaving the number of segments as the default of 1 can cause unintended consequences, such as full surrender of the bond when only a part withdrawal is required.
- Withdrawal Strategy
Under this setting, found under Life Fund, we suggest that you select the option labelled Attempt to Optimize, as detailed here...
- Planned Withdrawals
Use this screen to input any withdrawals the client is currently making from the bond, as detailed here...
- Previous Withdrawals/Top-Ups
This section is used to record details of withdrawals, and/or top ups to the bond prior to the start date of the plan. It will be necessary to enter some additional details, in order for the software to reflect the tax implications as accurately as possible.
- Remaining Principal/Cost Basis
This is the total remaining value of all invested principal (i.e. original investment, plus any top-ups, less tax-deferred withdrawals), i.e. this value should reflect the 'cost basis' of the asset, as at the plan start date.
Important Note - the default Remaining Principal/Cost Basis is £0. If you do not change this, the software will assume that all of the principal has been used prior to the start date of the plan, and all future withdrawals from the bond will be treated as chargeable events.
If no withdrawals or top ups have been made, the Remaining Principal/Cost Basis should be input as the same as the Purchase Value.
- Most Recent Excess Withdrawal (year)
In the event that the owner(s) have taken a taxable withdrawal, at some point in the past, the year of this withdrawal needs to be entered (as this impacts on any 'top-slicing' calculations).
- Previous Top-Ups/Segment Encashments
In the event that segments have been either liquidated, and/or 'topped-up', the relevant number of segments should be entered, as applicable, at each anniversary of the policy start date. As indicated, where existing segments have been 'topped-up', the corresponding value of the 'top-up' should also be entered, in the relevant year.
As an example, a Bond may have been purchased in 2015, with 100 segments, and an original investment of £500,000. By 2018, no withdrawals had been taken (so no segments had yet been liquidated). In that year (2018), the individual chose to 'top-up the existing segments with an additional investment of £50,000. Given these facts, the Remaining Principal/Cost Basis would be equal to £550,000. For the year 2018, one would enter '100', under # Segments at Start and would enter '50,000' under Amount.