Chapter 5- Taxation Of Life Assurance and Pension-based Protection Products Flashcards
What is generally meant by qualifying
Any gain is not taxable
What is the annual premium limit for qualifying policies
£3600
What are the qualifying rules for temporary insurances exceeding 10 years?
- Must secure a capital on death and no other benefits
- Other permitted benefits are WOP, surrender value am annuity options, disability benefits of a capital nature
- Premiums must be payable at least annually for at least 10 years or 3/4 of the term
- Total premiums in one year must not exceed 2x total premiums in any other year or 1/8 of total. Premiums
- Capital sum on death must not be less than 75% of the premiums that would have been payable if death were to occur on 75th birthday
- Where benefits can be paid as a lump sum or series of sums, the rule operates on the smaller
What are the qualifying rules of term assurance less than 10 years?
- Must secure sum on death and no other benefits
- Permitted other benefits include participation in profits, surrender values, annuity options, increasable options, WOP, disability benefits of a capital nature
- Any surrender value must not exceed premiums paid
- Minimum 1 year term
- No minimum required life cover
What are the qualifying rules for Whole of Life?
- Must secure capital on death and no other benefits
- Permitted other benefits include participation in profits, surrender values, annuity options, increasable options, WOP, disability benefits of a capital nature
- Premiums must be payable at least annually for at least 10 years or death.
- Premiums payable in 1 year cannot be twice as much as any other year.
- No set term - whole of life.
- Capital sum on death must not be less than 75% of the premiums that would have been payable if death were to occur on 75th birthday
- Where sum assured can be paid as a lump sum or as a series of sums, the rule operates on the smallest sum payable.
What are the qualifying rules for Endowments?
Endowment
- Must secure capital payment on death and no other benefits
- Other benefits may be included except those of a capital nature. Surrenders and bonus payments are ignored.
- Premiums must be payable at least annually for at least 10 years or death.
- Premiums payable in 1 year cannot be twice as much as any other year.
- No set term - whole of life but must be at least 10 years.
- Capital sum on death must not be less than 75% of the premiums that would have been payable if death were to occur on 75th birthday except reduced by 2% for each year the life assured exceeds 55 at outset
- Where Sum Assured is payable in instalments the total is used for this purpose
- If a cash option is shown this will be used
How is the 75% qualifying rule applied on joint life policies on both first and second life?
Joint First is older life
Joint Second is younger life
What is the position regarding whether Family Income Benefit policies qualify?
Qualify if income and assurance would have qualified seperately or if the overall policy meets the conditions for a WOL or endowment policy
How does loading for premiums paid more than annually affect qualifying rules?
It is ignored
What is the max length of backdating for qualifying rules?
3 months
What is the time limit for reinstatement of a policy to continue to qualify?
13 months
How does a change of life assured affect a qualifying policy?
Usually no longer qualifies due to significant change but if it is deemed qualifying then deemed qualifying from date of original policy
Is a divorce settlement seen as consideration in relation to qualifying rules?
Yes
Can offshore policies be qualifying?
No
When was the £3600 premium limit introduced for qualifying policies and what is the name for policies affected before this date?
21st March 2012
Protected policies
What policies are exempt from the premium limit introduced in 2012?
Policies before 21/3/12
Pure protection policies with no surrender value
Existing mortgage endowment policies maintained for sole purpose of repaying interest only mortgage
How are restricted relief qualifying policies taxed?
Partly qualifying & partly non-qualifying
What are restricted relief policies?
Set up during transition period between 12/03 and 5/04 if premiums were more than £3600 py.
How does assigning a policy which was set up before the 6/4/13 affect a qualifying policy?
Not affected
Under what conditions will an assignment cause a policy to become a restricted relief policy after 6/4/13?
Divorce settlement
Court order
Between spouses
In or out of a trust
In what circumstances must a beneficiary write a written statement to the provider to confirm a policy meets RRQP status?
If issued after 6/5/13 If altered If assigned Inheritance of a policy If notice isn't given within 3 months
How are life funds taxed?
20%
How are offshore funds taxed?
No tax at source until surrendered to a uk policy holder at which point income tax is chargeable
What gain is made on life policy profits?
Chargeable gain
What tax are chargeable gains subject to?
Income tax and possibly CGT
What are the 5 chargeable events on non qualifying policies?
Death Assignment for money Maturity Excess events - Part surrender/part assignment/policy loans 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 plus relevant capital payments exceed the premiums paid plus the total gains on previous chargeable events
In what circumstances do maturity or surrender cause a chargeable event?
If amount paid out plus, relevant capital payments exceeds premiums paid plus total gains on any previous chargeable events. If the sum assured is paid in instalments the calculation is the capital value of the instalments
In what circumstance does assignment cause a capital event?
If total consideration plus any relevant capital payments exceeds the premiums paid plus 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 are allowed yearly
What is the formula for working out the tax relief on RRQPs?
Tax relief = total allowable premium/total premiums payable x gain
How are chargeable gains taxed?
Only at higher and additional rate payers
How is the gain top sliced if it pushes someone over the tax bracket for tax purposes on chargeable gains?
Gain/Years policy in force =amount added to income for year, and taxed accordingly
What is the tax consideration with chargeable gains that push someone over the additional rate tax bracket?
Loss of personal allowance at rate of £1 for every £2 over
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
OR
If creator still alive but resident outside uk immediately before the event
How much tax is payable on a chargeable gain in trust?
45% minus 20% basic tax credit
In what circumstances is the creator of the trust liable for tax from the chargeable gain?
If alive and uk citizen immediately before event
If event takes place in the tax year in which the individual dies
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 effected by chargeable gain taxation?
No
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?
Broadly same as onshore but fund doesn’t pay tax so taxed in full on gain, not just higher/additional amount
What is the rate of IHT over the nil rate band?
40% or 36% if 10% of estate left to charity
What is the annual exemption for IHT?
£3000 in gifts
What is the tapered relief on IHT on PETS?
0-3 = 40% 3-4 = 32% 4-5=24% 5-6=16% 6-7=8%
How are PETS valued?
As a loss to the estate
Are premiums for a life policy taxed by IHT?
No usually part of £3000 exemption, gift allowance or normal expenditure allowance
How can you insure against PETs?
Use a decreasing term assurance to protect against IHT and level term assurance to cover potential decrease in nil rate band
