5 - The taxation of life assurnace and pension-based policies Flashcards
What is a qualifying policy?
Type of life assurance policy that any gain is not taxable
What is a non-qualifying policy?
Type of life assurance policy that any gain could be subject to higher and additional rates of of income tax
What is the limit for qualifying policies that you can not be taxed on?
£3,600
Typically what makes a life assurance qualifying
If it builds a surrender value or maturity value
What are the main types of policy for qualifying rules
- Temporary insurance >10 years
- Temporary insurace < 10 years
- Whole life assurances
- Endowment Assurances
- Exempt Assurances
What are the benefits that include surrender values
Every policy except endowment assurances
What is the value of a surrender in temporary insurance fewer than 10 years
Surrender value cannot exceed value of premiums paid
In temporary insurance more than 10 years, how much total premium can they receive in one year
It must not exceed twice the total premiums payable in any other year
or
1/8 of total premiums payable over whole term
In endowment assurances , how much total premium can they receive in one year
Same as temporary assurance >10 years
What is the qualifying term for temporary insurance exceeding ten years
10 years
What is the qualifying term for temporary insurance < ten years
Not less than 1 year
What is the qualifying term for whole life assurances
No set time - whole of life
What is the qualifying term for endowment assurances
Policy must be at least 10 years
What is the 75% rule
The capital sum on death must be not less than 75% of the premiums that would be payable if death were to occur on the life assured’s 75th birthday.
For whole life assurances and temporary assurances generally
How long do joint life policies have to be in order for it to qualify
Policy must be 10 years + , or first death
Friendly society policies
Maximum premium, annual premium
Maximum premium: £25
Annual premium: £270
Friendly society policies
Policy length, and premium pricing
Policy term: At least 10 years
Premium must be level and payable at annual or shorter levels
When will a policy be activated if backdated up to 3 months
The policy will be made on date it which it was backdated
When will a policy be activated if backdated more than 3 months
Being made on date contracted was completed
If a change of life assured when does new contract begin and who organises this
On date of the change by HMRC
When a policy is replaced by a new qualifying policy as a result of change in lives assured when is the new policy started
**Date of original policy **for purpose of income tax
What is consideration (advisory)
Commission, also a divorce settlement is consideration
Offshore Policy - what must they do to be qualified
Life office becomes uk-authorised and premiums are payable to uk branch
Policyholder becomes resident in uk and life fund income is chargeable as corporation tax
What does annual premium limit not apply to
Pure protection qualifying policies (usually issued on non-qualifying basis) - no surrender value
Mortgage endowment policies for sole purpose of repaying interest only mortgage
When does annual premium limit apply to all policies
Dates
From 6th April 2013
Within transitional period from March 2012 - April 2013
Before 2012, where these becaome restricted relief qualifying policies
Assignment of qualifying policies after 2013
Making any of these assignments will cause policy to become Restricted relief qualifying policies
Assignment as part of divorce
Assignment as a result of court order
Assignment between husband an wife
Assignment into or out of trust
What is a Restricted Relief qualifying policies?
Restricted relief qualifying policies (RRQPs) are effectively taxed on a partly qualifying and partly non-qualifying basis.
How long do beneficiaries have to provide a written statement to provider (policy qualifying)
3 months otherwise it becomes non-qualifying
What does RQRP Include
21st March 2012 - 5 April 2013
What is the taxed at 20% in life funds
Cash, bonds, equities and property
What is exempt from tax in life assurance
UK dividends
Overseas dividends
Offshore life funds benefits
Not much tax on gain of underlying life fund
Allows for gross roll-up which is valuable to higher or additiona rate tax payer.
What happens if offshore life fund is surrendered
Chargeable of income tax at gain of progressive (basic, additional ya yaya)
What are the 5 chargeable events on non qualifying policies
Death
Assignment for money
Maturity
Part surrender
Surrender
What are the 2 potential chargeable events on qualifying policies and in which circumstance are they chargeable
Death and maturity if made paid up within ten years or 3/4of the term
In what circumstances on death does a chargeable event occur
if the surrender value immediately before death, plus any relevant capital payments, exceeds the premiums paid plus the total gains on previous chargeable events
In what circumstances do maturity or surrender cause a chargeable event
If the amount paid out, plus any relevant capital payments, exceeds the premiums paid plus the total gains on any previous chargeable events. Where the sum assured is payable by instalments, the amount taken for the calculation is the capital value of the instalments
In what circumstance does assignment cause a chargeable event
if the consideration, plus any relevant capital payments, exceeds the premiums paid plus the total gains on previous chargeable events.
What is meant by”relevant capital payments” in relation to determining whether a chargeable event has occurred
5% tax deferred withdrawals
What is the formula for working out the tax relief on RRQPs
Tax relief = (Total allowable premium/Total premium payable) * gain
How are chargeable gains taxed
Only at higher and additional rate as basic rate is deemed to be paid within the fund
What happens if a tax payer moves up in tax bracket as a result of gain in policy (basic - higher rate)? What is this called
If the gain would cause the taxable individual to move from the basic- to higher-rate bracket, or from the higher- to additional-rate bracket, ‘top slicing relief’ applies. This recognises that the gain has actually been made over a number of years and should not simply be applied in full to the current year’s income to calculate a tax charge
What is the tax difference between a basic rate gain and additional rate gain (if gain pushes the income to next tax bracket)
25% - difference between basic and additional rates
What is the personal allowance?
£125,140. £1 is removed per £2 of income - £12,570.
In what circumstances is the trustee liable for tax on a chargeable gain
If event occurs in tax year after the individual dies and 1 or more trustee is a uk resident
If creator still alive but resident outside uk immediately before the event
In what circumstance is a beneficiary liable for tax on a chargeable gain
If none of the trustees live in the uk
Does a beneficiary receive top slicing relief if they have to pay tax on chargeable gain
No
How is tax on a chargeable gain administered
It is the responsibility of the person liable to declare it on tax return
Are pension policies affected by chargeable gain taxation
NO
How much is PCLS can an individual take out
25% of lump sum - tax free
How much of uncrytallised funds pension lump sum is tax free
25%
Are exceoted group life policies exepmt from chargeable gains
Yes
How are second hand policies taxed
Selling could be chargeable event subject to income tax and when second hand owner recieves the proceeds could be subject to CGT
How are offshore policies taxed
This ‘gross roll-up’ on offshore funds means that tax will be due on the full amount of a chargeable gain, rather than being charged only to the extent that the gain exceeds the higher-rate threshold.
What is the rate of IHT over the nil rate band
40% or 36% if 10% of estate left to charity
What is the nil rate band
£325,000
What is the residential nil rate band
£175,000
What is the annual exemption for IHT
£3000
Who are exempt from IHT gifts
Chartities
Souse or civil partner
Chargeable Lifetime transfers tax cost exceeding nil rate band
20% - trustees pay tax
When does the IHT on PET start from
From the failed transfer “individaul dies within 7 years of transfer of gifts”. Person looking will look from last date of failed pet and go back 7 years, any gifts from the date of failed transfer will be liable to taking nil rate band.
14 year shadow
Taper relif on IHT on PETS and CLTS
0-3 = 40%
3-4 = 33%
4-5=24%
5-6=16%
6-7=8%
Valuing gifts - how can sometimes a transfer of gift lose more value to estate than gift itself
If gift is worth more in pairts
What might be a good assurance for decreasing PET tax
Term assurance - decreasing for taper relief (0-7 years)
Level term assurance - if PET exceeds nil rate band leads to 40% tax on all estate (not decreasing - 40% will be flat tax)
What is the amount received to spouse with children if husband dies instestate
first £322,000 given spouse then spouse takes 50% of remaining. other 50% given child/ren.
What is the maxiumum length a disclaimer can be used
within 2 years of death
and intended for CGT or IHT
Where is deed of variation often used
Where IHT or CGT is not tax efficient
