Endowment Assignment & 'Chargeable Event'

Gillianxx

Hello

My husband has decided to assign his half of our endowment policy to me

The policy is 23 years into a 25 year policy the amount is anticipated to be about £50,000 - the original policy was taken out against a mortgage which is now paid up and I am looking at this amount of money to be my pension - the policy is due to be paid out in May 2012. At the time of the payout I anticipate that I will be earning approx £30,000 per year

The assignment is by mutual agreement and has not gone through a divorce court etc

Can anybody help me with how much tax I will be having to pay (if any) on this amount - I have read that if the assignment is 'gifted' it is exempt? Can this type of assignment be gifted?

Have I not paid tax on the original payments? Will any tax due be paid in a lump sum when it is paid out or now when the assignment goes through?

Please help me - I am useless at this type of thing ......

Thanx

Annisele

I'm not an expert on this, so take the following with the pinch of salt it deserves. It's a complicated subject, and even HMRC has been known to change its mind about the relevant law.

I think the easiest way for you to find out the situation for your policy would be to write to the insurance company and ask whether there would be any tax consequences if your husband were to assign the policy to you. Don't phone them - chances are that the helpline staff will have no idea, and in any case you could do with their answer in writing.

HMRC publishes some general guidance on endowment policies and assignment here.

Usually, endowment policies were sold as 'qualifying' for tax purposes. That means that the return on the policy is tax free in the hands of the policyholder (but not completely tax free - the underlying fund pays tax). HMRC's guidance on that point is here.

It is possible for a 'qualifying' policy to lose its qualifying status - and if it does, then the policyholder might be liable for further tax. I think that assignments for money's worth can cause a policy to lose its qualifying status - but even working out whether or not an assignment is a gift can be a minefield.

A quick and dirty (and potentially inaccurate) calculation to work out whether tax is likely to be paid on the maturity of a non-qualifying policy is:

A = Total premiums paid towards the policy
B = Maturity value of the policy
C = B - A
D = C / the number of years the policy has been in force

So, C is the gain you made on the policy, and D is the average gain made per year.

You then add the amount at 'D' to your income for the year, and see whether that makes you a higher rate tax payer. If it doesn't, then usually there is no further tax to pay. However, the calculation I've given there is a simple version that doesn't work for everybody - eg if they're old enough to benefit from age allowance, or if they have multiple chargeable gains in any one tax year.

If there's any possibility that you'll have to pay tax on the maturity payment, then the insurance company should send you a chargeable event certificate with the payment. You would then plug the numbers from the certificate into your tax return.