Chapter 5 - Tax treatment of Life Assurance

Question 1

What is the main difference between a qualifying life assurance policy and non qualifying life assurance policy?

Answer 1

Any gains made on a qualifying policy is not taxable.

Any gains made on a non qualifying policy are potentially subject to income tax.

Question 2

What are the 5 chargeable events that can give rise to a tax charge on a non qualifying policy?

Answer 2

Death
Assignment
Maturity
Partial surrender (over 5%)
Surrender

Question 3

How is an onshore life assurance bond taxed?

Answer 3

20% within fund. Tax due on gain if it takes holder into higher or additional rate tax. Gain taxed at either 20% or 25% depending on HRT or ART.

Question 4

How is an offshore life assurance bond taxed?

Answer 4

No tax within fund – full gain taxable at marginal rates

Question 5

What does RRQP stand for?

Answer 5

Restricted Relief Qualifying Policy

Question 6

For a policy to be a qualifying policy what is the maximum annual premium?

Answer 6

£3,600

Question 7

What are some of the major rules to ensure a qualifying policy?

Answer 7

• Must secure a capital sum on death
• Minimum 10 year term (or 75% of term if less) – temporary plans
• Premiums paid at least annually.
• 1 year’s premium must not be double any other. No premiums to be more than 1/8th of total premiums.
• Sum assured not less than 75% of premiums throughout term.
• Since April 2013 annual premium limit of £3,600.

Question 8

What is the formula to work out how much of a gain is taxable for RRQP’s?

Answer 8

Gain x total premiums allowable / Total premiums paid

Question 9

For basic rate taxpayers, a system known as what is used to assess if the gain is subject to further tax?

Answer 9

Top slicing

Question 10

How do you calculate a top sliced gain on a life assurance bond?

Answer 10

Surrender value + any withdrawals within 5% - Original investment amount = gain.

Gain / number of whole years policy in force = top sliced gain.

Question 11

With regard to a trust investment. If the settlor is dead and was not alive in the tax year of encashment then how is it taxed?

Answer 11

It will be taxed at trust rates. So if a discretionary trust 45%

Question 12

With regard to a trust investment. If the settlor is alive in the tax year of encashment then how is it taxed?

Answer 12

On the settlor

Question 13

With regard to a trust investment. If the trustees are not UK resident in the tax year of encashment then how is it taxed?

Answer 13

The tax is then levied on the beneficiaries at their marginal rate

Question 14

How is a 2nd hand endowment policy taxed?

Answer 14

It is subject to income tax on the original holder (seller) and CGT on the new holder (buyer)

Question 15

What is the current NRB?

Answer 15

£325,000

Question 16

What rate of IHT is payable on estates over £325,000?

Answer 16

40%

Question 17

What rate of IHT is payable on estates over £325,000 with 10% being left to charity?

Answer 17

36%

Question 18

What are the IHT exemptions for gifts with respect to marriage?

Answer 18

o Parent - £5,000
o Remoter relative - £2,500
o Anyone else - £1,000

Question 19

How much is the IHT annual exempt amount?

Answer 19

£3,000

Question 20

How much is the IHT small gifts allowance?

Answer 20

£250

Question 21

Name 3 IHT exemptions

Answer 21

Any 3 of the following:

• Spousal – in life and on death
• Charity – uk registered life and death
• Marriage
• Annual exemption - £3,000 if not used last year can also use
• Small gift - £250, to as many people as you wish
• Normal expenditure – gifts out of surplus income, not capital, cant affect standard of living
• Gifts for national benefit

Question 22

What is the difference between a PET and a CLT?

Answer 22

Assuming the donor survives 7 years a PET will not become subject to any tax.

If the cumulative total of CLTs in the last 7 years exceeds the available NRB then a CLT will be subject to an immediate tax charge.

Question 23

What rate of tax is applied on an immediate tax charge for CLTs?

Answer 23

20% if paid by trustees and 25% if paid by settlor

Question 24

What is a gift with reservation?

Answer 24

Making a gift but retaining a benefit. Treat on death like the gift never happened. Giving away house and still living there rent free, gifting away a bond and still taking an income, painting but still having it on your wall.

Question 25

What is taper relief?

Answer 25

A relief given on gifts in excess of the NRB if death occurs between years 3 – 7. Will reduce amount of IHT due on gift.

Question 26

An estate and everything within it can not be released to the executors until all the IHT due has been paid.

True or False?

Answer 26

True

Question 27

Since 2007 spouses have been able to do what with regard to their NRB?

Answer 27

If not used on first death it can be used by the survivor on 2nd death.