life assurance based investments

Question 1

Conventional WP Savings Plans

Answer 1

• 10-year term for qualifying status
• Level, regular premiums
• Guaranteed sum assured payable on death/maturity
• Bonuses added to guaranteed sum assured annually at declared rate
• Terminal bonus added at maturity/earlier death (some insurers may also pay on surrender)

Question 2

Low-Cost Endowment

Answer 2

• Basic sum assured lower than death sum assured
• Premiums start low and increase over 5/10-year period
• Virtually no new business is now written.

Question 3

Unit Linked Savings Plans

Answer 3

• Now dominate the market
• Premiums buy units in unit linked fund
• Choice of fund
• Since April 2013 - cap on contributions into qualifying policies of £3,600.

Question 4

Early Encashment

Answer 4

• Surrender penalties
• Selling may produce greater sum
• Terminal bonus not usually paid on surrender - unless close to maturity

Question 5

Bonds as Trust Investments

Answer 5

• Provide wide variety of funds
• Generate no taxable income
• Underlying fund taxed at lower rate (Corporation tax) than trust rate
• Able to assign to beneficiaries with no tax charge
• 5% withdrawal facility with no immediate tax charge

Question 6

Chargeable Gains

Answer 6

• Dead settlor rule: no tax if settlor died in tax year before year of gain
• Rule change in Finance Act 1998 stopped this
• Gain treated as individual’s income if settlor alive and UK resident immediately before chargeable
gain
• If settlor dead or non-UK resident immediately before chargeable gain and UK trustee, then
trustees chargeable
• If trustees non-resident then chargeable on beneficiary/no top slicing and no credit for tax in fund
• Trustees can assign policy to beneficiary before chargeable event
• So, on encashment the tax is chargeable on the beneficiary and not the trust
• This allows top-slicing and no tax liability if beneficiary’s income is below higher rate threshold

Question 7

Personal Portfolio Bonds

Answer 7

• investor’s own portfolio wrapped in a bond
• HMRC imposes penal taxes
• Effectively taxing investor as if investment was yielding 15%
• Regardless of actual growth
• This is on top of the normal tax charge on a part surrender

Question 8

Friendly Society Policies

Answer 8

• Tax-efficient savings but limited on size of contract
• No income tax or CGT on investment returns
• £270 annual limit per annum (or if paid monthly at £25pm = £300pa)
• Funds grow free of tax
• High degree of security
• Return tax-free after 7 1⁄2 years

Question 9

Taxation of Life Assurance Funds

Answer 9

• Dividends are exempt from tax
• All other income eg from fixed interest & cash and rental income - taxed at 20%
• Capital gains on gilts and corporate bonds - tax exempt
• Capital gains on other assets eg shares and property - taxed at 20% (indexation allowance is
available capped to 31st December 2017)

Question 10

Qualifying Policies

Answer 10

• Term of at least 10 years
• Premiums paid at least annually
• Life assurance: min. 75% of premiums paid
• Premiums in any 1 year not more than double those in any other year
• No premium more than 1/8th of total premiums
• Annual limit for premiums of £3,600

Question 11

Early Encashment of qualifying policy

Answer 11

• Chargeable event within first 10 years or 3⁄4 term
• Gains count as income for Married Couple’s Allowance, Child Benefit and Universal Credit/Child
Tax Credit
• Maturity proceeds - no income tax or CGT if original owner or surrender after 10 years

Question 12

Taxation of Non-Qualifying Policies

Answer 12

All gains taxable but only payable if:
• Chargeable event occurs: o Death
o Maturity
o Surrender
o Final encashment
o Certain part surrenders
o Assignment for money’s worth
• Chargeable gain arises: and/or
• When the gain is added to total income it is in the higher or additional rate

Question 13

Segmentation of bond

Answer 13

• Taking out cluster of identical small bonds instead of one large bond
• Provides alternative to repeated part surrenders
• Ensures period over which gains are spread dates back to inception
• On part surrenders in excess of 5% allowance date is only back to last chargeable event
• Topping up - add additional premium to existing bond/top-slicing relates to full term even if some
of the gain relates to top-up part way through

Question 14

Second-Hand Policies/Traded Endowment Policy (TEP)

Answer 14

• Original owner could receive higher price than surrender value
• Seller executes deed of assignment
• Buyer serves notice on life assured (to protect their interest)
• Buyer responsible for future premiums/should keep in touch with life assured

Question 15

second hand policy taxation on buyer/seller

Answer 15

Taxation on Seller

If qualifying policy sold after 10 years or 3⁄4 term not chargeable event
If qualifying policy sold within 10 years or 3⁄4 term then chargeable event
If non-qualifying policy always a chargeable event
No CGT on seller if beneficial owner

Taxation on Buyer

If qualifying policy held until maturity/death then no chargeable event for income tax
If non-qualifying policy held until maturity/death, then chargeable event (gain is maturity value (or SV immediately before death claim) less total premiums paid by buyer and seller)
For CGT claim is disposal as not original owner Buyer deducts purchase price & premiums paid from gain