Tax

Question 1

How is the fund of a life company taxed?

Answer 1

Liable to corporation tax of around 20%

On capital gains realised in their funds

And on most types of income received by their funds

Question 2

When may a policyholder be subject to income tax?

Answer 2

If a chargeable gain occurs

Question 3

Are policyholders subject to CGT or basic rate income tax on their policy proceeds, and why?

Answer 3

No because the life company has already paid tax on its funds

Question 4

If a chargeable gain occurs, what tax may the policyholder be subject to?

Answer 4

Higher or/and additional rate income tax

Question 5

When would a policyholder have made a gain on their plan?

Answer 5

If the proceeds are higher than the amount of premiums paid

In death claims, the gain is based on the SV immediately before death

Question 6

Can policy proceeds ever be subject to Capital Gains Tax or Income Tax?

Answer 6

Only income tax at the higher or additional rate if a chargeable gain occurs

Question 7

When does a chargeable gain occur?

Answer 7

When a gain is made due to a chargeable event on a qualifying or non-qualifying policy

Question 8

What are the main requirements for a Qualifying policy?

Answer 8

1. The premiums must be payable for at least 10 years (1 year for term assurances)
2. Premiums must be payable annually or more frequently
3. The premiums in any given year must not be more than twice the premiums in any other year
4. The total of premiums payable in any one year must not exceed 1/8 of the total premiums payable over the whole term (or the first 10 years if WOL)
5. The sum assured must not be less than 75% of the total premiums payable (for Endowments, there are reductions for older policyholders)

Question 9

How much is the annual premium limit?

Answer 9

£3,600

Question 10

Explain the annual premium limit

Answer 10

This is a limit for premiums payable in any 12 month period by an individual policy beneficiary under any qualifying policies and/or tax-exempt policies issue by friendly societies

Question 11

Which policies does the annual premium limit apply to?

Answer 11

1. All policies issued from 06 April 2013
2. All policies issued in the transitional period from 21 March 2012 to 05 April 2013
3. Certain policies issued before 21 Mar 2012 where significant variations occur

Question 12

Can a single premium policy be qualifying?

Answer 12

No (unless it’s a term assurance for less than 10 years)

Question 13

When can a temporary insurance with a term of 10 years or less be a qualifying policy?

Answer 13

If the policy conditions confirm that any SV won’t exceed the amount of premiums paid

Question 14

Which policies are exempt from the annual premium limit?

Answer 14

~ Pure protection policies that can’t have a SV

~ Pure protection policies where the benefits payable can’t exceed the amount of premiums paid (except on death or disability)

~Existing mortgage endowment policies maintained or altered for the sole purpose of repaying an interest-only mortgage on maturity, death, or earlier disability

~Excepted group life policies (EGLP) not running beyond age 75, with no SV, payable only to an individual or charity, and where no life assured can benefit

Question 15

Are qualifying policies subject to chargeable gains?

Answer 15

Not if the policy is held unaltered for the shorter of 10 years or 3/4 of the term.

Yes if the policy is surrendered or assigned for money within this period as this would count as a chargeable event

Yes if the policy is made paid up within this period and the following will be chargeable events (whenever they happen):

~ payment of death benefits
~ maturity of the policy
~ surrender of the policy
~sale of the policy

Question 16

Is an assignment into trust considered assignment for money (in relation to a qualifying policy)?

Answer 16

No

Question 17

Is an assignment into trust considered a chargeable event (in relation to a qualifying policy)?

Answer 17

No

Question 18

Is an assignment for money considered a chargeable event (in relation to a qualifying policy)?

Answer 18

Yes, if it happens within the shorter of 10 years or 3/4 of the term

Question 19

If a policy was made paid up within 3/4 of the policy term, would a surrender of the policy in the last quarter of the term be considered a chargeable event (in relation to a qualifying policy)?

Answer 19

Yes

Question 20

Name 4 chargeable events (for non-qualifying policies) whenever they occur

Answer 20

1. Death
2. Maturity
3. Sale
4. Surrender

Question 21

Which tax may the sale proceeds of a non-qualifying policy be subject to?

Answer 21

Income tax

Question 22

What is the 5% rule?

Answer 22

5% tax deferred withdrawals are allowed under non-qualifying plans

Question 23

Under the 5% rule, what is the 5% based on?

Answer 23

The value of the premiums paid to date for each year the policy has been in force (e.g. 5% in year 1, and 10% in year 2 if no previous withdrawals)

Question 24

Under the 5% rule, if the total encashments exceed the premiums paid to date, what would happen?

Answer 24

Any excess would be treated as an immediate chargeable gain for income tax purposes

Question 25

Under the 5% rule, if the withdrawal is over 5%, what would happen?

Answer 25

Any excess would be treated as an immediate chargeable gain for income tax purposes