Chapter 5 - Tax treatment of Life Assurance Flashcards Preview

Financial Protection - R05 > Chapter 5 - Tax treatment of Life Assurance > Flashcards

Flashcards in Chapter 5 - Tax treatment of Life Assurance Deck (27)
Loading flashcards...

What is the main difference between a qualifying life assurance policy and non qualifying life assurance policy?

Any gains made on a qualifying policy is not taxable.

Any gains made on a non qualifying policy are potentially subject to income tax.


What are the 5 chargeable events that can give rise to a tax charge on a non qualifying policy?

Partial surrender (over 5%)


How is an onshore life assurance bond taxed?

20% within fund. Tax due on gain if it takes holder into higher or additional rate tax. Gain taxed at either 20% or 25% depending on HRT or ART.


How is an offshore life assurance bond taxed?

No tax within fund – full gain taxable at marginal rates


What does RRQP stand for?

Restricted Relief Qualifying Policy


For a policy to be a qualifying policy what is the maximum annual premium?



What are some of the major rules to ensure a qualifying policy?

• Must secure a capital sum on death
• Minimum 10 year term (or 75% of term if less) – temporary plans
• Premiums paid at least annually.
• 1 year’s premium must not be double any other. No premiums to be more than 1/8th of total premiums.
• Sum assured not less than 75% of premiums throughout term.
• Since April 2013 annual premium limit of £3,600.


What is the formula to work out how much of a gain is taxable for RRQP's?

Gain x total premiums allowable / Total premiums paid


For basic rate taxpayers, a system known as what is used to assess if the gain is subject to further tax?

Top slicing


How do you calculate a top sliced gain on a life assurance bond?

Surrender value + any withdrawals within 5% - Original investment amount = gain.

Gain / number of whole years policy in force = top sliced gain.


With regard to a trust investment. If the settlor is dead and was not alive in the tax year of encashment then how is it taxed?

It will be taxed at trust rates. So if a discretionary trust 45%


With regard to a trust investment. If the settlor is alive in the tax year of encashment then how is it taxed?

On the settlor


With regard to a trust investment. If the trustees are not UK resident in the tax year of encashment then how is it taxed?

The tax is then levied on the beneficiaries at their marginal rate


How is a 2nd hand endowment policy taxed?

It is subject to income tax on the original holder (seller) and CGT on the new holder (buyer)


What is the current NRB?



What rate of IHT is payable on estates over £325,000?



What rate of IHT is payable on estates over £325,000 with 10% being left to charity?



What are the IHT exemptions for gifts with respect to marriage?

o Parent - £5,000
o Remoter relative - £2,500
o Anyone else - £1,000


How much is the IHT annual exempt amount?



How much is the IHT small gifts allowance?



Name 3 IHT exemptions

Any 3 of the following:

• Spousal – in life and on death
• Charity – uk registered life and death
• Marriage
• Annual exemption - £3,000 if not used last year can also use
• Small gift - £250, to as many people as you wish
• Normal expenditure – gifts out of surplus income, not capital, cant affect standard of living
• Gifts for national benefit


What is the difference between a PET and a CLT?

Assuming the donor survives 7 years a PET will not become subject to any tax.

If the cumulative total of CLTs in the last 7 years exceeds the available NRB then a CLT will be subject to an immediate tax charge.


What rate of tax is applied on an immediate tax charge for CLTs?

20% if paid by trustees and 25% if paid by settlor


What is a gift with reservation?

Making a gift but retaining a benefit. Treat on death like the gift never happened. Giving away house and still living there rent free, gifting away a bond and still taking an income, painting but still having it on your wall.


What is taper relief?

A relief given on gifts in excess of the NRB if death occurs between years 3 – 7. Will reduce amount of IHT due on gift.


An estate and everything within it can not be released to the executors until all the IHT due has been paid.

True or False?



Since 2007 spouses have been able to do what with regard to their NRB?

If not used on first death it can be used by the survivor on 2nd death.