Taxation of Life Assurance

Question 1

What is rule number 1 for the general qualifying rules?

Answer 1

The policy should be designed to pay a lump sum on death, earlier disability, or maturity for endowments.

Question 2

What is rule number 2 for the general qualifying rules?

Answer 2

Premiums must be paid - regularly annually or more frequently.

Question 3

What is rule number 3 for the general qualifying rules?

Answer 3

Policy term of 10 years
or
if shorter term 3/4 with premiums paid annually as minimum.

Question 4

What is rule number 4 for the general qualifying rules?

Answer 4

Minimum life assurance 75% of total premiums.

Question 5

What is rule number 5 for the general qualifying rules?

Answer 5

Premiums in any one year can not be more than twice the premiums in any other year.

Question 6

What is rule number 6 for the general qualifying rules?

Answer 6

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)

Question 7

What is rule number 7 for the general qualifying rules?

Answer 7

Annual premium level of £3600 (unless exempt)

Question 8

What is rule number 8 for the general qualifying rules?

Answer 8

Certain other benefits such as wavier of premium or critical illness cover may be included without breaching the rules.

Question 9

What is rule number 9 for the general qualifying rules?

Answer 9

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.

Question 10

What is rule number 10 for the general qualifying rules?

Answer 10

Where a policy lapses, they must be reinstated within 13 months to maintain qualifying status.

Question 11

What is rule number 11 for the general qualifying rules?

Answer 11

A change of life assured means the policy starts from scratch.

Question 12

What policy condition is exempt the qualifying rules?

Answer 12

Term assurance set up to pay off the outstanding balance of a mortgage.

Question 13

What is the qualifying limit?

Answer 13

£3600 per person per annum.

Question 14

What does a pre march 2012 policy that gets altered become?

Answer 14

Restricted relief qualifying policy (RRQP)

Question 15

How is a RRQP taxed?

Answer 15

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.

Question 16

How is the relief for a RRQP calculated?

Answer 16

Gain x (total allowable premiums/total premiums) = relief

Total allowable = every premium before March 2012 and every premium bellow £3600 after.

Question 17

When calculating relief, how are premiums counted for joint policies and absolute trusts?

Answer 17

Joint full premium counts towards each policy holders limit.

Absolute trust will count toward the limit of beneficiary absolutely entitled.

Question 18

Can non-taxpayers reclaim tax on protection policies?

Answer 18

No

Question 19

Having used their personal savings allowance, how much will a higher rate tax payer pay on a non-qualifying policy?

Answer 19

20% deemed paid then 20%
Full 40% for offshore

Question 20

What will an additional rate tax payer pay on a non-qualifying policy?

Answer 20

No personal savings allowance
20% deemed payed then 25%
Full 45% for offshore

Question 21

How do you work out top slicing?

Answer 21

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.

Question 22

What are examples of chargeable events?

Answer 22

Surender
Maturity
Part surenders and assignment for money or moneys worth.

Question 23

Does top slicing take place before or after using the personal savings allowance?

Answer 23

Before i.e. if an additional rate taxpayer, the personal savings allowance would be lost.

Question 24

What order is taxation on a trust other than a bare trust.

Answer 24

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.

Question 25

Can a beneficiary benefit from top slicing?

Answer 25

No

Question 26

What is the difference in the way the tax is determined between offshore and onshore bonds?

Answer 26

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.

Question 27

Which policies might change ownership?

Answer 27

Endowments and with profit investment funds.

Question 28

What can happen with early surender on a with profits policy

Answer 28

Market value reduction charge

Question 29

Explain with profit

Answer 29

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.

Question 30

What is a second-hand policy?

Answer 30

When someone sells and endowment that they no longer need. To avoid surrendering it and missing out on the terminal bonus.

Question 31

How much of the premiums would need to be paid to avoid tax for the original owner of a second hand policy?

Answer 31

3/4 of the term or 10 years if shorter

Question 32

What tax does a buyer pay on a second-hand policy?

Answer 32

Capital gains tax.