Chargeable Event Certificate

coffeedrinker

My life endowment policy has just matured and the amount received will be £32,000. It is non-qualifying for tax purposes.

The polcy was paid over 25 years and I estimate that the total premiums paid over this time amounts £15,500.

I therefore assume that my gain is £16,500.

I earn £40,216 and have a tax code of 668L

Will I have to pay any tax on the gained amount?

Any help will be gratefully received!

kingstreet

http://www.hmrc.gov.uk/helpsheets/2008/hs320.pdf

Calculating a gain on maturity or full surrender

A gain on maturity or full surrender may be shown on the certificate provided by the insurer, together with the amount of Income Tax treated as paid. If not, it is calculated as follows:

Gain = (X + Y) minus (Z + A), where:

'X' is the single lump sum benefit receivable as a result of the maturity or full surrender. (If you do not receive a cash payment on maturity or surrender because the full value of the amount of the benefits payable under the policy is transferred to a new policy, amount X is equal to the value transferred to the new policy. If, instead of a single lump sum, you are to receive a series of sums as a result of maturity or full surrender (including if you opt to receive an annuity), X equals the value of the right to receive those sums at the time when the right to
them arises. Ask your insurer about the valuation if you do not have a chargeable event certificate or if the certificate does not tell you what the value is.)

'Y' is all benefits (money or anything of value) received at any time previously under this or any 'related policy' (see below) with the exception of critical illness benefits or disability benefits – see page 8. Benefits also include loans made by your insurer, or under an arrangement made by your insurer, to you, or, on your Part 5 – How is a gain calculatedHS320 2008 Page 20 behalf, to someone else. Free gifts costing your insurer no more than £30 are left out of account.

'Z' is all amounts paid as premium under this or any related policy.

Where on or after 21 March 2007 you paid premiums totalling over £100,000 into your policy or policies in the same tax year and your adviser passed on commission in respect of the premiums to you, or reinvested commission as premium into your policy, then you must reduce Z by the amount of commission passed on or reinvested.

'A' is all gains which arose on part surrenders or part sales in a tax year before that in which your policy matured or was fully surrendered. This includes gifts made before 6 April 2001 or on your insurer previously making a loan.

All of the amounts above, apart possibly from A, should be available from your insurer if you wish to check the calculation. If you are unable to work out the amounts of previous gains your insurer again may be able to help you.

(£32,000 + £0?) - (£15,500 + £0?) = £16,500

The gain is then divided by the number of complete years the policy was held to calculate what is taxable, so £16,500 / 25 = £660.

This is added to your income, but tax is only payable at higher rate if you are a higher rate taxpayer, as basic rate tax is deducted within the fund.

A few years since I learned this, so any second opinion would be helpful!

BoGoF

kingstreet wrote: »

http://www.hmrc.gov.uk/helpsheets/2008/hs320.pdf



(£32,000 + £0?) - (£15,500 + £0?) = £16,500

The gain is then divided by the number of complete years the policy was held to calculate what is taxable, so £16,500 / 25 = £660.

This is added to your income, but tax is only payable at higher rate if you are a higher rate taxpayer, as basic rate tax is deducted within the fund.

A few years since I learned this, so any second opinion would be helpful!

Actually the full gain is treated as income in the year it is paid. The division you have described only applies when calculating top slicing relief if the gain takes you into the higher rate tax bracket. And not all chargeable gains are treated as having suffered basic rate tax.

kingstreet

Hi BoGoF,

Have you seen an online guide or information resource you can refer me to? The HMRC stuff is too long-winded and is more centred on surrenders.

Aren't all life funds taxed at source now? Blimey - I do need a refresher!

kingstreet

BoGoF wrote: »

Actually the full gain is treated as income in the year it is paid. The division you have described only applies when calculating top slicing relief if the gain takes you into the higher rate tax bracket. And not all chargeable gains are treated as having suffered basic rate tax.

I've re-worked it according to a calculator I found online. Can you see if you agree;-

OP has taxable salary in tax year 2010-2011 of £33,531 (after personal allowances) and a chargeable event gain of £16,500 on the maturity of a life policy held for twenty-five years. The basic rate band for 2010-11 is £37,400.

The tax liability for 2010-11 before top-slicing relief is:
Salary (after pers allow) = £33,351
Chargeable event gain = £16,500
Total taxable is therefore = £49,851

Tax @ 20% on £37,400 = £7,480
Tax @ 40% on £12,451 = £4,980

Total liability £12,460

Calculation of relief

Step 1 The OP’s taxable income (including the chargeable event gain) is £49,851. The portion of the chargeable event gain falling into the higher rate band is £12,451 (£49,851 - £37,400).
Some top-slicing relief will be available. N (years) will be twenty-five.

Step 2 The additional tax on this £12,451 is £2,490 (£12,451 x (40% - 20%))
Step 3 The ‘annual equivalent’ of the gain is £660 (£16,500/25)

Step 4 The portion of the ‘annual equivalent’ falling into the higher rate is -£3,389. (£33,351 + £660 - £37,400)

The calculator says if a UK fund, you can make a deduction of BRT at 20%, but assume the gross gain for an offshore fund. Does that sound right?

coffeedrinker

I have now received my Chargeable Event Certificate. It states:

Maturity Value: £32000
Total Premiums Paid: £14749
No of Years : 25
Total Gain On This Event: £17215
Income Tax Treated as Paid (20%): 3451

Bearing in mind my salay of £40216 and my tax code of 668L, will I have to pay any additional tax on this gain?

Many thanks.