Protection Topic 8 – The tax treatment of protection policies Flashcards
what is a Qualifying policy
policies that fall within a certain set of rules and are advantageous for tax. If qualifying, no extra tax besides the basic rate paid by the company falls on the policyholder.
what is a Non-qualifying
proceeds from policies may be taxable, they are taxable with a special form of tax related to income tax. This special tax is ONLY for life policies.
Rules for a qualifying policy for 10 years or less:
- Policy must secure a capital sum on death or earlier disability – and no ‘other benefits’
- ‘Other benefits’ excludes capital benefits for disability, WoP, surrender values and increasing cover options
- Surrender value cannot be more than the premiums paid
- Policy term must be at least 1 year
Rules for a qualifying policy for 10 years or more, endowments and WOL:
- Policy must secure a capital sum on death or earlier disability – and no ‘other benefits’
- ‘Other benefits’ excludes capital benefits for disability, WoP, surrender values and increasing cover options
- Premiums must be payable at least annually or more frequently
- Premiums must be paid for at least 7.5 years (or until death if it is earlier) to retain qualifying status
- Total premiums in a 12-month period cannot be more than double of another 12-month period
- Total premiums in a 12-month period cannot be more than 1/8 of the total premiums due over the whole policy
- Sum assured must not be less than 75% of premiums paid
Since 2012, there is an annual contribution limit of…. per person for a qualifying policy. If the contributions are in excess of this, there is a chargeable gains taxation.
£3,600
Gains made from NQPs are taxable and is the policyholder’s responsibility, they arise from a chargeable event, which can be:
- On surrender of policy
- On death
- On maturity
- On assignment of the policy
When a chargeable event occurs, the life company notifies
the policyholder and HMRC.
Gain is calculated as
benefits paid minus the premiums paid. For death claims, it is the surrender value right before death minus the premiums paid
Part-surrenders
Part surrenders allow a 5% annual withdrawal (essentially an investment bond) and the limit can be carried forward in part (or whole) to future years. Above this 5% withdrawal, an immediate 20% tax charge is implied for higher-rate and 25% for additional.
Taxation of term assurances
Term assurances are pure protection meaning there is no surrender value in question.
Tax rules for offshore life policies are:
- Not subject to UK taxation if life funds are in an offshore policy
- If funds are invested in countries that tax, it may not always be recoverable
- Double taxation treaty in place
- Tax not payable until proceeds arrive
- Gain can be reduced in respect of the amount of time during the plan the person was not UK-resident
- Taxable gains charged at respective tax brackets unless tax deducted at source (for this, must be insured by company in EU or EEA)
Taxation of traded endowment policies
No CGT is liable for the original policyholder of these policies, as the life office pays the CGT as it is invested. For a traded endowment policy (TEP) the rules are different, and the buyer and seller are treated differently for tax purposes.
- Sale of qualifying policy
no tax is due to the seller if policy is qualifying when sold
- Sale of non-qualifying policy
if policy is sold before 7.5 years, it will be non-qualifying, and basic-rate tax will already be paid so will only require more for higher and additional taxpayers
- Taxation of proceeds for TEP
for the original seller, no tax is payable if the policy if qualifying, for NQP a chargeable event occurs. The buyer will be liable to CGT charges on encashment on endowment for both qualifying and NQP, and also a potential income tax for NQPs
