Chapter 5 - The Taxation Of Life Assurance And Pension-based Protection Policies

Question 1

If the life fund of a UK insurer receives income from deposits, what percentage is usually payable as tax on this income

Answer 1

20 % Broadly

Question 2

What does the minimum required life cover have to be for a policy to be qualifying?

Answer 2

75%

Question 3

If a qualifying policy lapse is due to nonpayment of premiums, how long do they have to reinstate the policy with out any effect?

Answer 3

13 months

Question 4

The premiums paid for a policy set up to fund the cost of a potential inheritance tax liability are considered to be gifts, but will usually be exempt under the

Answer 4

Normal expenditure exemption

Question 5

What is the maximum contribution that can be made into a tax exempt, friendly society life policy?

Answer 5

£25 per month

Question 6

For an adult policy to be qualifying how long must it have a term running?

Answer 6

10 years

Question 7

The premiums payable on a joint life second death policy, compare to those on to single life policies would typically be

Answer 7

Lower

Question 8

Peter has a qualifying life policy with a timer for 20 years. What type of change would potentially result in a chargeable event?

Answer 8

Assignment for moneys worth within the first 10 years

Surrender, certain parts, renders, and part assignments, policy loans at a non-commercial rate of interest, death and maturity

However, the last two are only chargeable events if the policies are made up within 10 years or 3/4 of the term if sooner

Question 9

Where a chargeable gain arises under a life policy. It is the responsibility of who to declare and pay tax

Answer 9

It is up to the policyholder to declared again on the tax return for the tax year, in which the chargeable event occurs

Question 10

What is the effective rate of tax on interest within a UK life fund

Answer 10

20%

Question 11

What is the minimum some assured for a whole of life policy to be qualifying?

Answer 11

This is where the 75 rule comes into play. It’s 75% of premiums which will be payable if death occur on the life is short 75th birthday.

Question 12

When is death a chargeable event on the qualifying policy?

Answer 12

If the policy has been paid up within the first 10 years or 3/4 of the term, if sooner or 3600 a year premium room in place has been breached

Question 13

What is a relevant capital payment for a chargeable gain calculation?

Answer 13

Any benefit of a capital nature paid under the policy before the charge of event

Question 14

If a life policy is mortgaged who has to pay any tax on a chargeable gain

Answer 14

The mortgagor

Question 15

What is a transfer value for IHT purposes

Answer 15

Any disposition made by a transfer by which the value of the estate immediately afterwards is less than it would have been, if the disposition has not been made

Question 16

What is the current lifetime rate of IHT?

Answer 16

20%

Question 17

Which two IHT exemptions are often used for policy premiums

Answer 17

The annual and normal expenditure exemptions

Question 18

When assigning nonqualifying life insurance policy, what conditions if any must be active in order for there, to be no tax charge purely in virtue of the assignment

Answer 18

Only the assignments must be an outright gift

Question 19

If someone is liable to inheritance tax but only on her assets located in the United Kingdom, this shows that for inheritance tax purposes, the client is what

Answer 19

Deemed to be domicile in the UK

Question 20

After what amount of time would a gift become entirely exempt from inheritance tax?

Answer 20

Seven years

Question 21

What event if any must occur for the possibility of capital gains tax liability, eventually arising on surrender of the qualifying life assurance policy

Answer 21

Assignment for money or money’s worth

Question 22

Liam died, leaving in a state valued at £360,000 when the inheritance tax nil rate band was £312,000. He left £156,000 to his son and a reminder to his wife, Louise. She dies in July 2022, when a state valued at £750,000 and leaves everything to her son. If Louise and Leem had always lived in rented accommodation, the IHT due on Louise estate would be how much

Answer 22

Remember that money transferred on death does not coming within the nil rate band and so do you 156,000 means that half of the fathers nil rate band is left to the wife.

Now on her death, we have half of his nil rate band, as well as her full nil rate band, so …

750,000 - 325,000 - 162,500 = 262,500

262,500 x 0.4 = 105,000 which is IHT due

Question 23

Frank has received a gift from his father of £500,000. That is classed as a potential exam to transfer. If he wishes to insure against the possibility of an inheritance tax charge, you should take out a what

Answer 23

Seven-year decreasing term insurance, this is because after seven years of exam to transfer will be fully exempt from IHT. As tapered relief is applied this year is decreasing the amount of IHT reaches nil at seven years which is why it is decreasing to not level

Question 24

Alan has made a gain of £6000 on his nonqualifying life insurance policy. This gain could be liable for what

Answer 24

Higher and additional rate of income tax only

Question 25

Melvin has a 10 year qualifying life insurance policy. What situation could give rise to a chargeable event?

Answer 25

There are a number of situations that could give us a chargeable event however, these would mostly be due to assignment for the money before the 3/ quarters of the police term has run, i.e. the surrender of the policy after six years

Question 26

Marie has an onshore life insurance policy and Claire has an offshore life insurance policy. The difference in the tax treatment of the funds is

Answer 26

Marie is funds will be taxed at roughly, the basic rate of income tax, while Claire’s fund will have gross roll up

Question 27

Make a card of about tapered relief

Answer 27

Not applicable for the first 3 years, after that it’s 20% off the 40% iht tax until year 7 where it’s Nil, it only happens on PETs

Question 28

Life office is making a payment to policyholder on the surrender of a life assurance policy that involved are chargeable gain. How will the life office pay the proceeds?

Answer 28

Without deduction of any further tax due

Question 29

Under what circumstance might an income protection policy provider, PA commuted lump sum to the insured rather than continue, paying the benefits on a regular basis

Answer 29

It is not expected that the client will recover from the incapacity

Question 30

A client receiving benefits from his employers group, income protection scheme. I will these be treated in relation to his personal tax liability

Answer 30

They will be taxed in the same way as normal pay

Question 31

When calculating a proportion of benefits under an income protection policy, how will they usually defined previous earnings?

Answer 31

Average earnings for the year or six months prior to incapacity

Question 32

Helen has made a chargeable gain of £4500, on the surrender of a non-qualifying life insurance policy. If a taxable income in 2021/22 is £40,000, she will be liable for which of the following taxes on the gain Capital gains tax at 10% Capital gains tax at 20% Income tax at an extra 20% Income tax at an extra 40%

Answer 32

Island taxable income (income after the personal allowance) is already in excess of the basic rate band which is £37,700 for the year 21/22. The full amount of the gain is therefore subject to higher rate tax at 20% at 20% is deamed to have already been taken in the life fund. This means Alan Willow, an additional 20% on the £4500 gain

Question 33

When making a claim on the maturity of a secondhand life insurance policy, what tax could a chargeable gain face?

Answer 33

Capital gains tax

Question 34

Donald are UK. Resident placed a life assurance policy in trust in July 2011 for his grandchildren and appointed his two sons, also UK residence, as the trustees. A chargeable event occurred on the policy in July 2021, giving rise to a chargeable gain. Donald is alive and well. Whose income with the game be chargeable

Answer 34

Donald

Question 35

Peter made a potentially exempt transfers of £240,000 in September 2019. Explain the inheritance tax implications on his estate if he dies in March 2021, assuming no annual allowances were available.

Answer 35

The nil rate band available against the state will be reduced to £85,000 after the reduction of the whole potentially exam transfer as take for the relief only starts after three years and would only reduce the amount of tax payable not the value at self

Question 36

After the assignment of a qualifying endowment policy, how long must a person who has been assigned to complete and return a written statement to the provider to determine whether it is nonqualifying orchestrated a relief qualifying policy

Answer 36

Three months

Question 37

After the surrender meant of an offshore life insurance policy, what rates of income tax what the chargable gain likely be subject to?

Answer 37

Basic rate higher rate and or additional rate income tax

Question 38

Additional rate taxpayer in the UK has surrendered and offshore bond. What tax if any will he be subject to on the gain?

Answer 38

45%

Question 39

When is the only time that CGT is payable on a life assurance policy

Answer 39

When it is bought on the second hand market, however usually life policy’s would be subject to income tax

Question 40

Chargeable events for non-qualifying policies

Answer 40

Use the acronym D-A-M-E-S Death (if it gives rise to a benefit Maturity Excess events - certain part surrenders and part assignments or policy loans Surrender

Question 41

Chargeable events for qualifying policies

Answer 41

Death and maturity Surrender, partial surrender/part assignments Policy loans at non-commercial rate of interest Assignment for money or moneys worth but only when the policy is made paid up within 10 years, or 3/4 if the term whichever is sooner.