Tax and Life Insurance in the UK

Up until Mar 1984 Life Insurance policies were taxed at a reduced level (15%). These days premiums are not usually subject to be offset against income tax or corporation tax. Non-investment policies do not trigger any income or capital gains tax.

On the other hand, policies that are considered having an investment intend such as whole of life, endowment or investment bond policies are taxable at a level determined by the qualifying status of the policy based on certain criteria met by the contract.

Policies for over 10 years are normally considered qualifying and their proceeds are exempted from income and capital gains tax.

Short term, less than 10 years, and single premium policies are generally subject to income tax depending on your marginal rate for the year you make a gain.

Policy holders who are a higher rate tax payers or become one as a result of the transaction is subject to pay tax on the gain at the difference between the higher and the lower tax rate.

5% accumulative allowance – this is a feature which especially benefits the investment bonds. It gives you the ability to draw 5% of the original investment amount each policy year absolutely tax free. If you do not withdraw the 5% it can roll over to the following year(s) and be withdrawn tax free at future year but is subject to maximum accumulation of a 100% of the premiums payable.

This is a very useful to higher rate taxpayers who expect to become basic rate taxpayer at some time in the future (retirement). It will give them tax free lump sum payout.

The proceeds of a life policy will be included in the estate subject to inheritance tax. If the poly was written in trust may fall outside the taxable estate and therefore avoid being taxed.

Pension Term Assurance

Prior to Dec 6^th, 2006 when the Chancellor, Gordon Brown, announced the withdrawal of the scheme, the Pension Term Assurance was the most common form of life insurance sold in the UK. Most UK insurance providers called it “life insurance with tax relief”. PTA is a normal term life assurance which pays all premiums taxed at basic rate of 22%. In addition higher rate taxpayers can access further 18% tax relief via their tax return.

There are no more new policies sold but the existing pension term insurance policies are still allowed to use the tax benefit.

If you had a valid pension term assurance and expired after the withdrawal you can no longer renew it and utilize those tax benefits. You will have to purchase new life insurance which will be subject to the current tax legislation.

Disclaimer: This article is for information purposes only and not to be considered as advice. Please consult with independent financial advisor and/or a solicitor.
Original Article by Wikipedia

 

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