When surrendering an onshore investment bond, it is possible to combine both the 5% per annum cumulative tax allowance with segmentation to reduce the chargeable gain.
This can be shown by working through an example:
An onshore bond with an original investment amount of £100,000, of 100 segments, was held for 3 years and had a current valuation of £150,000. The bondholder needed to surrender £69,675.
It is possible to use both the cumulative 5% per annum allowable withdrawals and the surrender of segments to keep the taxable gain to a minimum.
First, we work out the current value of each segment:
100 segments of £150,000 gives us a value of £1,500 for each segment.
If the bondholder surrenders 37 segments, this gives a surrender value of 37 x £1,500 = £55,500.
We can then apply partial withdrawals of 3 x 5% of the remaining 63 segments: 15% of (63 x £1,500) = £14,175.
Total surrender = £55,500 + £14,175 = £69,675.
We can then work out the chargeable event gain as being 37 x (£1,500 – £1,000) = £18,500.