Taxation of Life Assurance Flashcards
What is rule number 1 for the general qualifying rules?
The policy should be designed to pay a lump sum on death, earlier disability, or maturity for endowments.
What is rule number 2 for the general qualifying rules?
Premiums must be paid - regularly annually or more frequently.
What is rule number 3 for the general qualifying rules?
Policy term of 10 years
or
if shorter term 3/4 with premiums paid annually as minimum.
What is rule number 4 for the general qualifying rules?
Minimum life assurance 75% of total premiums.
What is rule number 5 for the general qualifying rules?
Premiums in any one year can not be more than twice the premiums in any other year.
What is rule number 6 for the general qualifying rules?
No premium should be more than 1/8 of the total premiums due over the term of the contract (for whole of life, the first 10 years)
What is rule number 7 for the general qualifying rules?
Annual premium level of £3600 (unless exempt)
What is rule number 8 for the general qualifying rules?
Certain other benefits such as wavier of premium or critical illness cover may be included without breaching the rules.
What is rule number 9 for the general qualifying rules?
The sum assured should be no less than 75% of the premiums paid over the term (75 years for whole of life)
Reduced to 2% per annum for endowments of over 55 year old on outset.
Joint life first death is set by oldest
Joint life second death youngest.
What is rule number 10 for the general qualifying rules?
Where a policy lapses, they must be reinstated within 13 months to maintain qualifying status.
What is rule number 11 for the general qualifying rules?
A change of life assured means the policy starts from scratch.
What policy condition is exempt the qualifying rules?
Term assurance set up to pay off the outstanding balance of a mortgage.
What is the qualifying limit?
£3600 per person per annum.
What does a pre march 2012 policy that gets altered become?
Restricted relief qualifying policy (RRQP)
How is a RRQP taxed?
As a qualifying policy and partly as non-qualifying.
Any payments up to the point of RRQP qualify.
Anything after is tested against the qualifying limit.
How is the relief for a RRQP calculated?
Gain x (total allowable premiums/total premiums) = relief
Total allowable = every premium before March 2012 and every premium bellow £3600 after.
When calculating relief, how are premiums counted for joint policies and absolute trusts?
Joint full premium counts towards each policy holders limit.
Absolute trust will count toward the limit of beneficiary absolutely entitled.
Can non-taxpayers reclaim tax on protection policies?
No
Having used their personal savings allowance, how much will a higher rate tax payer pay on a non-qualifying policy?
20% deemed paid then 20%
Full 40% for offshore
What will an additional rate tax payer pay on a non-qualifying policy?
No personal savings allowance
20% deemed payed then 25%
Full 45% for offshore
How do you work out top slicing?
Gain/years to make=topslice
Topslice+income= total amount to check against threshold
20 or 25% of difference above = tax
Tax x number of years held = total liability
Reread this.
What are examples of chargeable events?
Surender
Maturity
Part surenders and assignment for money or moneys worth.
Does top slicing take place before or after using the personal savings allowance?
Before i.e. if an additional rate taxpayer, the personal savings allowance would be lost.
What order is taxation on a trust other than a bare trust.
Taxed on the settlor if alive or died this tax year.
Taxed on trustees if died another year.
Taxed on beneficiary if trustees are not UK based.
Can a beneficiary benefit from top slicing?
No
What is the difference in the way the tax is determined between offshore and onshore bonds?
Onshore deducted at basic rate whilst invested
Offshore is on the gross roll-up.
No tax other than non-recoverable withholding taxes are charged during investment. The income is rolled up, and the sale of assets escapes capital gains.
HMRC offers no credits for these.
Which policies might change ownership?
Endowments and with profit investment funds.
What can happen with early surender on a with profits policy
Market value reduction charge
Explain with profit
Investment fund policy that pays part of the returns as a bonus and keeps some for bad years.
A fianal bonus or terminal bonus is paid if any remains at the end of the policy.
What is a second-hand policy?
When someone sells and endowment that they no longer need. To avoid surrendering it and missing out on the terminal bonus.
How much of the premiums would need to be paid to avoid tax for the original owner of a second hand policy?
3/4 of the term or 10 years if shorter
What tax does a buyer pay on a second-hand policy?
Capital gains tax.
