Life insurance and self assessment

astronautoreo

Hi I'm completing my self assessment tax return for 2023-24

Can someone advise me on the following question:

Did you receive any other UK income, for example, employment lump sums, share schemes, life insurance gains?

My husband sadly passed away in November 2021. He had a life insurance policy which wasn't put in trust. The policy paid out to the estate in August 2023. The estate made a distribution to myself and beneficiaries in October 2023. 

Am I right that I answer no to this question? As I didn't receive the income from the life insurance policy, I received an inheritance.

There was tax to pay on gains to the policy, which anyway were paid by the life insurance company.

I just want to make sure I answer the question correctly.

poseidon1

astronautoreo said:

Hi I'm completing my self assessment tax return for 2023-24

Can someone advise me on the following question:

Did you receive any other UK income, for example, employment lump sums, share schemes, life insurance gains?

My husband sadly passed away in November 2021. He had a life insurance policy which wasn't put in trust. The policy paid out to the estate in August 2023. The estate made a distribution to myself and beneficiaries in October 2023. 

Am I right that I answer no to this question? As I didn't receive the income from the life insurance policy, I received an inheritance.

There was tax to pay on gains to the policy, which anyway were paid by the life insurance company.

I just want to make sure I answer the question correctly.

Life assurance 'gains' refer to insurance company investment bonds. 

These are single premium lump sum investments that allow the policy holder to withdraw up to  5% of the intial investment as a non declarable 'income'.

Any growth within theses investment bonds are potentially  liable to  income tax on interim or  final encashment, and it is this type of policy where income gains can arise for self assessment purposes.

Now if the death of your husband crystallised a policy gain as defined above because he was the sole life assured, then the insurance company would have issued a 'chargeable gain certificate' identifying the gain to be declared on your husband's final personal tax return in year  of  his death. Any tax due on him would give credit for 20% tax deemed to have been paid within the bond by the insurance company.

The net cash then distributed into the estate from the policy   should then  be free of any further income tax issues as far as the beneficiaries are concern, except with regard to any interest paid by the insurance company if policy proceeds were paid very late after death. The interest amount would be separately identified for clarity.

However  I see in this regard, that death occurred November 2021 but no policy pay out until August 2023. Does this mean the death claim proceeds were held by the insurance company for that entire period ( therefore interest thereon maybe in point) , or did the investment bond remain invested post death  ( because you were a joint life assured of the bond with your husband) and not encashed/surrendered until August last year, with a chargeable gain certificate triggered at that point?

If the latter then the executors of the estate  would  need to deal  with the policy gain by issuing all beneficiaries with a form R185  'Statement of income from estates' for 2023/24,  declaring their respective share of the gain at box 19 of the form. The form indicates the 20% tax credit thereon is not recoverable by non tax payers, but anyone else could have additional income tax to pay depending on whether the policy gain pushes them into the 40% tax bracket or beyond.

So if you have received a form R185 from the executors for 2023/24, that should indicate whether you ( and the other beneficiaries),  have anything to report by way of any policy gain.

Therefore a bit more information required from you to be able to give you a definitive response.

astronautoreo

Hi there

Thanks for your detailed reply, really helpful. The gains were due to interest paid out. The claim was put in soon after my husband died but delays in granting Probate meant the life insurance company didn't pay out until August 2023. They paid tax on the interest before paying the estate. The estate then distributed funds to beneficiaries.