Arizona life insurance - Arizona term life insurance quote - life insurance Arizona

From a life insurance company you can trust.

TAXATION OF LIFE INSURANCE IN THE U.K

Non-investment life policies do not normally attract either income tax or capital gains tax on claim. If the policy has as investment element such as an endowment policy, whole of life policy or an investment bond then the tax treatment is determined by the qualifying status of the policy.

Qualifying status is determined at the outset of the policy if the contract meets certain criteria. Essentially, long term contracts (10 years plus) tend to be qualifying policies and the proceeds are free from income tax and capital gains tax. Single premium contracts and those run for a short term are subject to income tax depending upon your marginal rate in the year you make a gain. All (UK) insurers pay a special rate of corporation tax on the profits form their life book; this is deemed as meeting the basic rate (22% in 2005-06) laibility for policyholders. Therefore if you are a higher rate taxpayer (40% in 2005-06), or become one through the transaction, you must pay tax on the gain at the difference between the higher and the basic rate. This gain may be reduced by applying a complicated calculation called top-slicing based on the number of years you have held the policy.

Although this may seem complicated the taxation of life assurance based investment contracts is broadly deemed beneficial compared to alternative equity based collective investment schemes (unit trusts, investment trusts and OEICs). One feature which especially favours investment bonds is the ability to draw 5% of the original investment amount each policy year without being subject to any taxation on the amount withdrawn. The withdrawal is deemed by HMRC (Her Majesties Revenue and Customs) to be a payment of capital and therefore the tax calculation is defered until further encashment above the 5% limit. This is an especially useful tax planning tool for higher rate taxpayers who expect to become basic rate taxpayers at some predictable point in the future (e.g. retirement).

The proceeds of a life policy will be included in the estate for inheritance tax (IHT) purposes. Policies written in trust may fall outside the estate for IHT purposes but it's not always that simple. If in doubt you should seek profession advice from an IFA (Independent Financial Adviser) who is regisetered with the government regulator: the Financial Services Authority.

BACK TO TOP