Paying tax on surrendered endownment

MinnieMouse1_2

Back in the early 1990s we took out endowments to cover the mortgages on our 1st, 2nd and 3rd houses. Further down the line in 2003, we were financially able to convert our latest mortgage to largely repayment and, as our endowments were failing to cover even a small portion of the mortgage at this time, we surrendered two of them. We had by this time taken out a large life assurance plan and did not need the policies for this cover. The final endowment was left in place to cover a reduced amount (9000 instead of the original 15000). This is due to mature May 2015 having run a term of 23 years.
This summer we phoned the company, Phoenix Life, as we had not received a statement for 2012 and were told that it hadn't been sent, as bonuses were at 0% again! Just out of interest we requested a surrender value. When this arrived we were surprised to find that the value was £9830, therefore above our requirement for the mortgage.
We decided that surrendering was the best option for us, however the notes enclosed with the paperwork indicated that there may be tax implications on surrendering the policy where there is a financial gain and you are taxed at the higher rate, as we are.
The policy has run for 21 years with the normal premium being paid each month during this term and I believe it to be a qualifying product. The issue is being high tax payers. Will we have to pay or not?

dimbo61

I think this answers your question fully.

http://www.theguardian.com/money/2012/apr/18/failing-endowment-taxed

Please click on the link above.
You have NO TAX to pay on an endowment policy you have had for over 10 years :-)

MinnieMouse1_2

Thanks for that link.

kingstreet

You're sure it was a qualifying policy and you never altered it in any way?

If that is the case, the surrender proceeds are tax free.

If it is a non-qualifying policy, basic rate tax is deemed to have been paid within the fund and only a liability to higher rate tax could exist, but this is subject to "top slicing" so you would not pay tax on the whole amount, just the gain averaged over a number of years.

MinnieMouse1_2

From what I have read about qualifying status I believe us to have a qualifying product, ie. we paid the set amount each month for 21 years, never altered or amended the amount or missed payments. As I mentioned earlier the issue we have is the high tax element. If we were to have to pay tax on the surrender amount, we would then risk falling short of our £9000 mortgage payment.

holly_hobby

From what you have said, your policy was and has remained qualifying - meaning there is no top slicing exercise (ie tax assessment) reqd on the proceeds, regardless of your tax position (ie basic or higher rate payer).

Hope that helps

Holly x

kingstreet

You'll be fine, unless it was originally a non-qualifying policy and there weren't many of them used for house purchase.

I can only remember GRE's "Freedom For HomeBuyers" off the top of my head.

MinnieMouse1_2

Thanks, it will be a relief to be able to pay this part off. :j