Skip to main content
BlogFinancial planning

Encashing a Bond – Do you Understand the Tax Implications?

By July 21, 2014February 12th, 2019No Comments

Bonds are great investment tools, whilst invested there are no tax implications, you can take up to 5% of the investment tax-free and have great flexibility with the investment choices.

All great, but cashing IN a bond leads to a chargeable event which can cause tax problems:

Losing Allowances

The full amount of the chargeable event is added to your income for the year in which the event occurs which may lead to a loss of:

  • Personal Allowance if it takes your income above £100,000
    • Potential Tax cost of up to £4,000
  • Age Allowance if you are over 76 and it takes your income above £27,000
    • Potential Tax cost of up to £132
  • Child Benefit if it takes your income over £50,000 and you receive Child Benefit
    • Potential Tax cost of £1,066 for first child and £705 for each subsequent child

Whilst top slicing helps reduce higher rate tax (see below), it DOES NOT help for these.

Higher Rates of Tax 

If you are a higher or additional rate tax payer before the chargeable event, you will be subject to 40% or 45% tax on the entire gain in the year which the event occurs.

If it’s an onshore bond, then the notional tax credit of 20% reduces the actual liability due to HMRC.

Even if you are a basic rate tax payer prior to the event, you may be stung by a tax liability if the top slicing relief is not sufficient to cover the entire higher rate tax liability.

Basic Rate Tax (Offshore Bonds Only)

If it’s an offshore bond, there is no notional tax credit which means at least 20% tax is due on the event.

Trust Tax

It’s common to hold these bonds under a form of trust which can lead to further tax liabilities.

If the bond is encashed within the trust, then the trust is liable to tax on the chargeable event.

Trusts pay the highest rate of income tax (currently 45%) on all income above the first £1,000 (which is taxed at 20%).

If there is more than one trust in place, then this £1,000 will be split between the trusts thus reducing the 20% tax band and increasing the liability.

HMRC will expect a trust tax return to account for this income and liability will need to be paid from the proceeds before they are distributed to the beneficiaries.

Whilst it is possible for the beneficiaries to reclaim some or all of the tax deduction via their own tax returns, the timing may not match up meaning that you are giving HMRC an interest-free loan!!

Planning Opportunities

As bonds can be assigned at any point, it is worth considering other family members who may pay a lower rate of tax to avoid the large tax liabilities.

This is a must within a trust if the ultimate aim is to pay the proceeds to the beneficiaries.

Partial encashments lead to chargeable events; however there are two ways to partially encash the bond. Carefully consider the options and the tax implications to ensure that you are withdrawing cash in the most tax-efficient manner.

If you have any queries, please contact Karen Robinson ( on 0161 975 6700.