Taxation of life assurance

Question 1

How is a UK life assurance fund taxed within the fund?

Answer 1

The fund pays 20% corporation tax on income and any taxable gains

Question 2

What is the taxation on the policyholder of a UK life assurance fund? (4)

Answer 2

If a chargeable event and a gain is made:-

• Fund has already been taxed at source, therefore the gain is deemed to have been paid net of 20%
• A non taxpayer cannot reclaim this
• No further liability for a BRT
• For a higher rate tax payer, this depends on whether the policy is qualifying or non qualifying (same with additional rate payer)

Question 3

What is the difference between a non qualifying and a qualifying UK life assurance fund in respect of the taxation that a higher rate tax payer/additional rate tax payer would need to pay?

Answer 3

Qualifying policies - there is no further tax liability
Non - qualifying - higher rate has a further 20% to pay with an additional rate tax payer 25% ( as 20% will have deemed to have been paid in the fund)
This is income tax and not CGT

Question 4

What are the rules for a policy (i.e. endowment/whole of life policy)to be classed as qualifying? (5)

Answer 4

• Set up for a minimum of 10 years
• Premiums must be regular (paid at least once a yr)
• It must run for the lesser of 10 years or three quarters of the term
• Life cover must be at least 3/4 of the premiums payable over the term (endowment) or the term to age 75 years(WOL policy)
• Premiums cannot increase over the term by more than double
• Premiums payable in the year cannot be more than 12.5% of the total premium

Question 5

Name a type of UK investment bond that does not have a life assured/life assurance contracts

Answer 5

Capital redemption bonds

Question 6

Why is an investment bond classed as a non - qualifying policy?

Answer 6

As this is single premium
Gains are therefore applied on a chargeable event
Higher rate tax payer and additional tax payer will have additional income tax to pay (205/25%)

Question 7

What is the 5% tax deferred withdrawal facility on an investment bond and how does it work?

Answer 7

Every year or part year 5% can be taken tax deferred
Based on the original amount invested
Works on part years so at 3yrs and 1 months - 20% can be taken tax deferred
Treated as returns of capital and not income
Once 100% has been taken any further withdrawals are immediately taxable

Question 8

When is income tax payable by an investor on an investment bond? (3)

Answer 8

• There is a chargeable event
• There is a gain
• Investor is a higher or additional rate tax payer

Question 9

At what point is the tax relevant to the investor when they hold an investment bond?

Answer 9

Their tax status when they encash

Question 10

Name 5 chargeable events

Answer 10

• Death of the policyholder (calculated on the investment gain less any premium paid - not the surrender value)
• Sale of the policy (assignment for money or money’s worth)
• Maturity (if the bond is fixed)
• Withdrawal of capital in excess of a cumulative 5% per annum
• Surrender

Question 11

What is an assignment without monetary consideration with an investment bond and is this a chargeable event?

Answer 11

Transfer of a bond between spouses and civil partners and no is it not a chargeable event

Question 12

What is top slicing, how do you do it and when would you use it?

Answer 12

This is used to calculate the tax position. You calculate the no of years and divide this by the gain. The slice is then added to the individuals taxable income. Only do this is the resulting taxable income is above higher rate tax of £32000.
Top slicing is based on complete years

Question 13

What must you remember when you top slice?

Answer 13

What ever the amount is over the £32000 then this is multiplied by the relevant tax rate ie 20% or 20% depending on whether they are higher rate or additional rate tax payers but you must also multiply this by the number of years

Question 14

What can sometimes reduce the amount of the chargeable gain paid with an investment bond?

Answer 14

Bonds are often divided into segments and rather than complete a part encashment across all segments, to may be better to fully encash certain segments.

Question 15

What is an offshore bond?

Answer 15

This is where offshore bonds are issued by subsidiaries of UK companies in tax friendly places such as Jersey and Guernsey and Isle of Man
Management expenses tend to be higher than onshore

Question 16

What is the main difference to an offshore bond with onshore bond?

Answer 16

No Uk tax is paid within the fund so that on any chargeable event a UK tax payer will pay at their marginal rate
(Topslicing, chargeable events and 5% tax deferred withdrawal all still exist with offshore)

Question 17

What is time apportionment relief in reference to an Offshore bond?

Answer 17

If the policyholder has been non-resident for part of the time that the policy has been held then the gain can be reduced by a fraction of non residence
This also reduces the number of years that you can top slice the bond with

Question 18

Name 3 disadvantages of an offshore investment bond to an onshore one

Answer 18

• There may be withholding tax in the fund
• Higher charges
• as there is no tax within the fund then the offshore bond cannot benefit from indexation of gains
• more tax is payable overall for a higher rate and additional rate tax payer

Question 19

When can gross -roll up with an offshore bond be an advantage

Answer 19

When it is held for a long time period ie a longer term investment

Question 20

What is the tax situation on chargeable events for a investment bond held in a bare trust?

Answer 20

The chargeable event is taxed on the beneficiaries.

Question 21

What is the tax situation on chargeable events under an investment bond in trust ( but not a bare trust) on the settlor who is alive and a UK resident?

Answer 21

Tax is assessed on the settlor

Top slicing can be used

Question 22

What is the tax situation on chargeable events under an investment bond in trust ( but not a bare trust) on the settlor who is dead or a non -UK resident and one or more of the trustees are UK resident?

Answer 22

UK trustees are chargeable at the rate applicable to trusts
If annual income is over £1000 then this is at 45% ( anything under the £1000 is at the basic rate for savings/dividends and if only one trust - this is split accordingly with the number of trusts)
Top slicing cannot be used

Question 23

What is the tax situation on chargeable events under an investment bond in trust ( but not a bare trust) on the settlor who is dead or a non -UK resident and none of the trustees are UK resident?

Answer 23

Tax is assessed on any UK beneficiaries
Top slicing cannot be used
Sometimes the Uk trustees can be replaced by offshore trustees before the chargeable event to make this more desirable or trustees can assign a bond or segments of it so any chargeable event is outside of the trust

Question 24

What is an annuity?

Answer 24

Contract for the individual (annuitant) where they pay a lump sum in return for an agreed income for a fixed period of time or for the rest of the annuitant’s life

Question 25

What is a purchased life annuity?

Answer 25

One that is not purchased as part of a pension arrangement
Income is separated into capital and interest
Interest is taxed at source as savings income
Capital element is tax free

Question 26

What are friendly societies?

Answer 26

Small mutual insurance companies that offer products
Can offer tax efficient products
Amounts invested are low - single premium £270, if on monthly basis then £25
Subject to the usual qualifying rules

Question 27

Are sales of second hand policies considered to be a chargeable event?

Answer 27

As this is an assignment for money, the sale is a chargeable event
The main interest in the market is for qualifying policies as any gain on these will fall under the CGT regime. If they were to be non-qualifying then income tax would be payable and CGT on any gain