Life Assurance products

Question 1

What criteria must a qualifying life policy meet?

Answer 1

• Premiums must be paid at least annually
• Policy term must be a minimum of 10 years
• Minimum life assurance cover must be 75% of the total premiums
• Annual premium limit is £3,600
• Annual premiums cannot be more than 2x those of any other year.

Question 2

What are the two ways unitised With Profits funds pay out bonuses?

Answer 2

Fixed price system - bonuses paid by increasing number of units daily throughout the year
Variable price system - bonuses paid by daily increases in the unit price

Question 3

What is the maximum annual premium amount that can be paid into a Friendly Society policy?

Answer 3

£25 per calendar month OR
£270 pa

Question 4

What are the benefits and drawbacks of with profits policies?

Answer 4

Benefits:
- Provide risk averse investors with exposure to equities
- Irons out volatility
- Generally outstrip inflation
- May allow investors participation in life company’s trading profits
- Regular and terminal bonuses

Drawbacks:
- Difficult to understand
- Lack transparency
- Inflexible
- Returns depend on subjective judgement of long-term returns
- Potential for MVR

Question 5

Why are bonds particularly suitable as trust investments?

Answer 5

• Wide range of funds
• No taxable income so minimal admin
• Life fund pays corp tax at lower rate than disc trust income tax
• Usually, no income tax on assignment to beneficiaries
• Tax-deferred allowance

Question 6

Where a bond triggers a chargeable event within a trust, who is liable for the tax charge?

Answer 6

• Settlor - if alive & UK resident
• ELSE the trustees if UK resident
• ELSE the beneficiaries

Question 7

What are the benefits of choosing onshore over offshore bonds?

Answer 7

• Utilises indexation relief up to 31/12/17
• Possible double taxation for offshore - withholding tax
• Charges usually lower
• Management expenses deductible for corp tax purposes
• HRT may pay less tax overall (36% v 40%)

Question 8

What is the tax treatment both within the fund and for the investor of a Friendly Society policy?

Answer 8

Within the fund:
- No tax on income/gains

For the investor:
- No tax on income/gains

Question 9

Outline the taxation within life funds

Answer 9

• Dividends (both UK and overseas) are tax exempt
• All other income taxed at 20%
• Gains on gilts/corp bonds are tax exempt
• All other gains taxed at 20% (indexation allowance applies up to 31/12/17)

Question 10

Describe how deficiency relief works.

Answer 10

• Eligible for full surrenders on bonds.
• If chargeable event shows a loss and there has been previous excess gains.
• Acts as income tax reducer
• Only available to HRT payers

Question 11

What tax planning can be undertaken with investment bonds?

Answer 11

• Assignment to spouse
• Full vs partial surrender of segments
• Encashing when other income is low

Question 12

What are the benefits and drawbacks of investment bonds?

Answer 12

**Benefits: **
- Easy fund switching (no CGT);
- Can be assigned to lower rate taxpayer (i.e. interspousal);
- No CGT;
- Income tax deferment good for those who expect tax rate to decrease;
- Good for trust investments
- Tax deferred allowance
**Drawbacks: **
- non-reclaimable tax within fund (onshore) - not good for non-taxpayers;
- can’t use CGT allowance;
- income tax deferment not good for those who expect tax rate to increase