8. Tax treatment of protection policies

Question 1

What are the criteria for a life assurance policy to be qualifying?
Term <10yrs (3)
Term >10yrs (5)

Answer 1

Term >10yrs
- pays capital sum on death or disability only
- surrender value cannot be higher than total prems
- term must be > 1yr

Term >10yrs
- prems payable at least annually
- prems payable for >10yrs or 75% of term
- prems in any 12m must not be 2x prems in any other 12m
- prems in any 12m must not be >12.5% total prems (for whole-of-life based on prems in first 10yrs)
- sum assured >75% total prems up to 75yo (term/w.o.l) or maturity (endowment - decreases by 2% for every year >55yo)

Question 2

What is the annual cap on contributions to qualifying LA policies?

Answer 2

£3,600
Any further makes that policy non-qualifying

Question 3

How do you calculate the gain on a policy? Death & non-death

Answer 3

Non-death:
Benefit - total premiums paid

Death:
Surrender value immediately before death - total prems paid

Question 4

What is the process to calculate tax on a non-qualifying gain? (4)

Answer 4

• Top-slice the gain:
  proceeds - premiums
  ______________________
  no. full yrs policy in force
• Add top-sliced gain to taxable income
• If in higher/addl band, multiply excess by 20/25%
• Multiply this by no. full yrs policy in force = tax due

Question 5

How are partial withdrawals/surrenders taxed?

Answer 5

Any above 5% cumulative are taxable at 20/25%

Question 6

How are death benefits paid to pension members taxed?

Answer 6

Tax-free up to lifetime allowance if die before 75
If die after 75, fully taxable

Question 7

How are offshore policies taxed?

Answer 7

Taxable in full unless EU/EEA providers with CT rate >20% in which case taxed as non-qualifying (i.e 20% credit)

Question 8

How are traded endowment policies taxed for seller and buyer?

Answer 8

Seller; no liability if qualifying. Treated as non-qualifying if sold <10y / 75%

Buyer; taxed on gain (CGT):
Maturity value - purchase price - premiums post-acq

Question 9

What is a viatical settlement?

Answer 9

Selling a life policy of terminally ill life-assured for % of sum assured

Question 10

How are premiums for a policy under trust treated for IHT?

Answer 10

As a gift - annual exemption available

Question 11

What is the IHT treatment of transferring an existing life policy into a trust (discretionary + bare). How do you calculate the value?

Answer 11

Discretionary = CLT
Bare = PET

Value of gift = greater of premiums paid to date or surrender value immediately before gift

Question 12

What is the tax treatment for CIC policies - individual & group

Answer 12

Individual:
- claims tax-free

Group:
- prems tax deductible

Question 13

What is the tax treatment for IPI policies - individual & group

Answer 13

Individual; tax-free

Group:
- ‘er conts deductible and not BIK
- proceeds taxable but then paid to ‘ees (deductible) then taxable on ‘ee

Question 14

What is the tax treatment for ASU, mortgage protection and PMI plans - individual & group

Answer 14

• IPT payable on premiums
• Proceeds tax-free

Group:
‘er conts are deductible & BIK