10 - Indirect Investments (G)

Question 1

What is the main difference between a qualifying and non-qualifying UK life policy with regards to its premiums and purpose?

Answer 1

Qualifying - premiums are regular and purpose is mainly for life cover

Non-qualifying - premiums are single premium policies mainly taken out for investment purposes.

Question 2

Premiums paid to a UK qualifying life policy are restricted to how much, across all policies, if issued on or after 6 April 2023?

Answer 2

£3,600 pa

Question 3

An individuals premiums are restricted to £3,600 on all their qualifying life policies issued on or after when?

Answer 3

6 April 2023

Question 4

Both the life company and the policyholder are taxed on UK life assurance policies, how much does the life company pay, on what type of income and how?

Answer 4

20% straight from the fund on interest income, property rental income and offshore income gains.

Question 5

UK dividends are generally exempt from tax within a UK life assurance policy.

True or false?

Answer 5

True

Question 6

How much in percentage terms does a life company pay in tax if sells assets from a UK life assurance fund at a profit?

Answer 6

20% on the gain

Question 7

Can the policyholder of a UK life assurance policy claim back any tax paid by the fund (life company)?

Answer 7

No

Question 8

Policyholders of a UK life assurance policy can be subjected to income tax on savings income on policy profits. These profits are also known as…

Answer 8

Chargeable again events (aka chargeable events)

Question 9

What is the CGT treatment on chargeable gain events?

Answer 9

Exempt, you do not pay CGT

Question 10

Why are qualifying UK life assurance policies more favorable than non-qualifying from a gains point of view?

Answer 10

All gains are taxable on a non-qualifying policy

Whereas only the gains made up or surrendered within the first 10 years are taxable

Question 11

Tax is only payable on a UK life assurance policy under which 3 circumstances?

Answer 11

When a chargeable event happens
When a chargeable even gain arises
If the gain takes the taxpayer into the higher or additional tax brackets

Question 12

What are the 6 chargeable events for a non-qualifying UK policy?

Answer 12

1. Death
2. Maturity
3. Certain part surrenders
4. Surrender
5. Policy loan
6. Assignment for money or moneys worth

Question 13

What are the chargeable events for a qualifying UK policy?

Consider time frames.

Answer 13

1. Surrenders, assignments (for money or moneys worth), and policy loans made within 10 years (or 3/4 of term if sooner)
2. On death or maturity if within 10 years again (or 3/4 of term if sooner) and was previously converted to a paid up policy within that time.

Question 14

Name 4 events that are not chargeable.

Answer 14

1. Assignments by way of mortgage
2. Assignments between spouses living together
3. Payment of critical illness benefit
4. Policy loans under certain conditions

Question 15

In which 3 circumstances could a chargeable event gain arise?

Answer 15

1. Maturity or surrender
2. Death
3. Assignment

…if the amount paid out exceeds the premiums paid in

Question 16

If the 5% tax deferred withdrawal is not taken in a policy year, can it be carried forward?

Answer 16

Yes

Question 17

For each premium paid into a policy, an amount equal to 5% of that premium can be withdrawn each policy year for 20 years without an immediate liability to income tax. Why is this?

Answer 17

This is due to the fact that for tax purposes, withdrawals taken within the 5% allowance are treated as a return of the original capital paid.

Question 18

Why might a policyholder apply to HMRC to have a chargeable gain calculated on a “just and reasonable” basis?

Answer 18

In the case of a chargeable gain being incurred even though the policy is at a loss

Question 19

Why must adviser charges first be considered before withdrawing 5% allowance on a UK life assurance policy.

Answer 19

In case the adviser charges are part of the 5% allowance, this could then trigger a gain if the withdrawal takes you over 5% after these charges.

Question 20

If a UK life assurance policy is joint, but policyholder paid in 80% of the premiums and policyholder 2 paid in only 20%, how is the gain split?

Answer 20

50/50 regardless of their proportions invested, unless they make a declaration to HMRC that they want them taxed in proportion.

Question 21

Why should larger partial surrenders over the 5% allowance be avoided on a UK life assurance policy?

Answer 21

They can produce artificial gains which are taxed on the higher and additional rate taxpayers

Question 22

What is a deficiency relief?

Answer 22

A relief available when the policy produces a loss when it comes to an end

Question 23

The disposal of a second hand policy does not usually give rise to chargeable gains for income tax and instead might be taxed how?

Answer 23

Capital gains (CGT)

Question 24

What is a traded endowment policy?

Answer 24

A life policy traded in the market from policyholder to new owner

Question 25

What is meant by an assignment for money’s worth?

Answer 25

An assignment to another person in exchange for an asset of a similar value.

Question 26

Why might HMRC need to see a certificate issued by the life company of a gain that arose? State 2 circumstances.

Answer 26

1. If it was an assignment for moneys worth
2. If the gain was worth more than half the basic rate tax upper limit (i.e., £18,850)

Question 27

What is the limit on the level of premiums paid into an exempt policy within a friendly society?

Answer 27

£270 pa (annually paid)
£300 pa (paid monthly at £25)

Question 28

What is a baby bond?

Answer 28

A qualifying life policy taken out by children under 18 with a friendly society

Question 29

What is the tax treatment on these 5 annuities:
1. Purchased life annuity
2. Purchased annuities certain
3. Pension annuities
4. Deferred annuities
5. Annuities for beneficiaries under trusts or wills

Answer 29

1. Taxed partly savings income, partly tax-free
2. Taxed partly savings income, partly tax-free
3. Taxed in full as earned income
4. Taxed as a PLA when annuity is taken
5. Taxed in full as savings income

Question 30

What does the rule surrounding gender pricing state when quoting annuities?

Answer 30

That gender should not affect the premiums paid and benefits received for an annuity.

Question 31

What is a structured settlement with regards to an annuity? What is the tax treatment?

Answer 31

Where the annuities are paid in settlement of a claim for damages in a personal injury. They are paid in smaller regular sums as opposed to a lump sum payout. Not taxable.

Question 32

What is an immediate needs annuity?

Answer 32

One that is used for long-term care

Question 33

Who generally receives the annuities on an immediate needs annuity?

Answer 33

The care provider

Question 34

What is the main difference between a purchased life annuity and a purchased annuities certain with regards to its term?

Answer 34

Purchased life annuity pays out until death

Purchased annuities certain pays out until a set date i.e., it is not dependent on human life

Question 35

When does the chargeable event gain arise where regular part surrenders are being taken at 6% a year?

Answer 35

On the last day of the policy year