5 - Tax on Life Assurance Flashcards
What tax impact does qualifying and offshore status have?
This is all about the taxation of gains.
It isn’t relevant for policies like term assurance, only for policies where a surrender or maturity value is built up.
Qualifying status used to be used a lot to protect endowment policies (effectively investments) from gains taxes, but the £3,600 annual premium limit means this is no longer effective.
Friendly policies
These have lighter qualifying restrictions but a limit of £270 per annum premium (which counts towards the overal £3,600 limit).
Qualifying Requirements
For policies under 10 years
- Surrender value can’t be greater than sum of premiums paid
- Must be at least one year term
- No minimum life cover requirements
Qualifying Requirements
For policies over 10 years or whole of life
- Premiums payable at least annually (i.e. quarterly/monthly are ok)
- Total premiums in any one year must not exceed either twice the premiums in any other year OR one eighth of all premiums (for lifetime policies this requirement is limited to the first 10 years)
- Capital sum due on death must be at least 75% of the premiums that would be paid by 75th birthday (for endowments this reduces by 2% for every year over age 55)
Qualifying - Complications
What is contingency?
Impact on qualifying status?
Contingency is an unusual contract where the payout depends on somebody else being alive when the life assured dies.
It has NO impact on qualifying status.
Qualifying Complications
Impact of backdating policies
Backdating a policy is when you sign a new policy but set the start date in the past.
If it’s less than 3 months you can count until the backdated date.
If it’s over 3 months you need to count from the date the contract is actually signed.
This could break qualifying status since high premiums will effectively be charged in the first year, or the one eighth rule might be broken.
Qualifying Complications
What happens if premiums are lapsed and the policy is later reinstated?
If it is reinstated within 13 months (on exactly the same terms as before, i.e. the insurers don’t reduce the payout or something) qualifying status remains.
Over 13 months and it’s considered a new policy which may not qualify.
Taxation of the Funds
For onshore and offshore funds
Onshore funds pay tax at around 19% on all income they receive, whilst offshore funds generally don’t pay any tax themselves.
This is the major difference between onshore and offshore funds.
Taxation on Gains
How are gains taxed?
If there is a chargeable event (either a payout on maturity/death, or surrender of policy or sale/assignment) then gains are taxed using top slicing method as income tax.
It is assumed 20% has already been paid so basic rate taxpayers pay nothing, higher rate 20% and additional rate 25%.
Offshore policies will get hit with full rate of tax (no 20% “discount”) and qualifying policies are exempt (unless they’re sold or surrendered early and break the qualifying rules).
Taxation on Gains
Who is taxed if the policy is in a trust?
- If the life assured is still alive then he is taxed, has to recover the tax from the trust.
- If the life assured is dead and any trustees are UK based, the trustees will be liable.
- If the life assured is dead and all trustees are abroad then any UK beneficiary will eventually be liable for the tax.
IHT
Rate
Nil rate band
Annual exemption
40% IHT rate (down to 36% if you give 10% of wealth to charity)
£325k nil rate band
£3k gifts per year are exempt (this limit is on the person giving the gifts, not the receiver, so you can’t give £3k to your son and £3k to your daughter)
IHT
How is main residence treated?
There is an additional main residence allowance on top of the nil rate band.
Amount is £100k in 17/18, stepping up by £25k per year for the next few years.
This nil rate band gets withdrawn gradually for homes above £2m value.
IHT
PETs and CLTs
PETs are exempt after 7 years, taper relief of 20% per year between 3 and 7 years.
CLTs are chargeable at 20% if the trustees pay it, 25% if the beneficiary pays it (this is just due to grossing up, it works out the same £ amount).
IHT Planning
Importance of life assurance to IHT planning
Assets can’t be paid out by the estate until tax bills have been settled, but the tax bill can’t be settled without using assets from the estate - catch 22!
Life assurance should be written under trust for the beneficiaries so that it doesn’t form part of the estate itself.
Then the payout will occur shortly after death, tax bill can be settled and the estate can be released.
IHT Planning
What type of policy for married couples?
Tax implication of the policy premium
Married couples would use a joint life second death policy, since there is no IHT when the first person dies, only the second person.
The premiums on the life assurance policy for IHT count as a gift to your beneficiaries, but should come under the £3k per annum limit.
