Tax on foreign life insurance payout to beneficiary?

B1ng0

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

Brie

Not sure why you would report it as it isn't income.  The same as if you receive an inheritance or simply a gift that's not income either.

B1ng0

yes, that would be my understanding but I'm not completely sure, as the hmrc guidelines at the link above are not exactly easy to understand. It's hard to understand what a 'gain' is for a foreign life insurance policy. Also, aren't inheritance and gifts above some threshold (not my case, but still) taxed? 

poseidon1

B1ng0 said:

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

The link  you provided primarily relates to single premium offshore life policies ( colloquially known as investment bonds). These are primarily unit linked investments with a basic life policy wrapped around them and are sold extensively in UK despite being ' foreign policies'.

These offshore investment bonds might produce a taxable gain liable to UK income tax on the policy holder if encashed during lifetime, or taxable on their estate if paid out as a death claim.

Both scenarios however, assume the policy holder was uk tax resident when encashment occurred.  Evidently your relative was not, so no basis for the proceeds to be taxed on the estate. Sometimes these policies are held in trust, but assume that this is not the case here.

As for your tax position as policy beneficiary by way of the proceeds,  you have no liabilty unless ownership of the policy was transferred to your legal ownership prior to encashment. I do not get the sense this happened in your case.

B1ng0

poseidon1 said:

B1ng0 said:

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

The link  you provided primarily relates to single premium offshore life policies ( colloquially known as investment bonds). These are primarily unit linked investments with a basic life policy wrapped around them and are sold extensively in UK despite being ' foreign policies'.

These offshore investment bonds might produce a taxable gain liable to UK income tax on the policy holder if encashed during lifetime, or taxable on their estate if paid out as a death claim.

Both scenarios however, assume the policy holder was uk tax resident when encashment occurred.  Evidently your relative was not, so no basis for the proceeds to be taxed on the estate. Sometimes these policies are held in trust, but assume that this is not the case here.

As for your tax position as policy beneficiary by way of the proceeds,  you have no liabilty unless ownership of the policy was transferred to your legal ownership prior to encashment. I do not get the sense this happened in your case.

Thank you for the detailed response!  Unfortunately that link is the only related information that I could find in the HMRC website. Is there any other official source clarifying what represents a taxable gain in these cases? I do trust your view that there should be no tax liability in my case, just looking for some reference. I think that the policy produced some yearly interest while it was active, which was not reinvested in the policy itself, but paid out instead (not to me). 

poseidon1

B1ng0 said:

poseidon1 said:

B1ng0 said:

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

The link  you provided primarily relates to single premium offshore life policies ( colloquially known as investment bonds). These are primarily unit linked investments with a basic life policy wrapped around them and are sold extensively in UK despite being ' foreign policies'.

These offshore investment bonds might produce a taxable gain liable to UK income tax on the policy holder if encashed during lifetime, or taxable on their estate if paid out as a death claim.

Both scenarios however, assume the policy holder was uk tax resident when encashment occurred.  Evidently your relative was not, so no basis for the proceeds to be taxed on the estate. Sometimes these policies are held in trust, but assume that this is not the case here.

As for your tax position as policy beneficiary by way of the proceeds,  you have no liabilty unless ownership of the policy was transferred to your legal ownership prior to encashment. I do not get the sense this happened in your case.

Thank you for the detailed response!  Unfortunately that link is the only related information that I could find in the HMRC website. Is there any other official source clarifying what represents a taxable gain in these cases? I do trust your view that there should be no tax liability in my case, just looking for some reference. I think that the policy produced some yearly interest while it was active, which was not reinvested in the policy itself, but paid out instead (not to me). 

Life policies by their nature, generally do not produce yearly  interest payable to policy holders. 

What was the name of the Insurance company and which foreign jurisdiction did it fall under?

 What you have described sounds more like a single premium policy withdrawal facility which permits up to 5% of the original capital to be withdrawn yearly. The name of the Insurance company should assist in  identifying  the type of policy you ultimately received a  benefit from.

B1ng0

poseidon1 said:

B1ng0 said:

poseidon1 said:

B1ng0 said:

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

The link  you provided primarily relates to single premium offshore life policies ( colloquially known as investment bonds). These are primarily unit linked investments with a basic life policy wrapped around them and are sold extensively in UK despite being ' foreign policies'.

These offshore investment bonds might produce a taxable gain liable to UK income tax on the policy holder if encashed during lifetime, or taxable on their estate if paid out as a death claim.

Both scenarios however, assume the policy holder was uk tax resident when encashment occurred.  Evidently your relative was not, so no basis for the proceeds to be taxed on the estate. Sometimes these policies are held in trust, but assume that this is not the case here.

As for your tax position as policy beneficiary by way of the proceeds,  you have no liabilty unless ownership of the policy was transferred to your legal ownership prior to encashment. I do not get the sense this happened in your case.

Thank you for the detailed response!  Unfortunately that link is the only related information that I could find in the HMRC website. Is there any other official source clarifying what represents a taxable gain in these cases? I do trust your view that there should be no tax liability in my case, just looking for some reference. I think that the policy produced some yearly interest while it was active, which was not reinvested in the policy itself, but paid out instead (not to me). 

Life policies by their nature, generally do not produce yearly  interest payable to policy holders. 

What was the name of the Insurance company and which foreign jurisdiction did it fall under?

 What you have described sounds more like a single premium policy withdrawal facility which permits up to 5% of the original capital to be withdrawn yearly. The name of the Insurance company should assist in  identifying  the type of policy you ultimately received a  benefit from.

I can confirm that this foreign life insurance policy produced yearly interest (although I don't know if that's the correct term in this case), which was paid to a beneficiary (again, not me). The original capital was not affected, that is, the yearly amount paid out was not withdrawn from it. Upon death of the policy holder, the payout that I received as a beneficiary corresponded to the original capital, unaffected by the yearly payouts. All I was trying to confirm is that this means that there are no taxable gains to report to HMRC in this case.

poseidon1

B1ng0 said:

poseidon1 said:

B1ng0 said:

poseidon1 said:

B1ng0 said:

I was a beneficiary of a foreign life insurance policy held by a relative (resident abroad), who passed away. I received the payout of the policy as a lump sum, and I'm trying to understand if any UK tax would be due. 

I read the HMRC helpsheet at https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2023, and I seem to understand that no UK tax is due on the payout, as no additional interest or premiums were paid to me while or after the policy was active, and the final payout basically matched the initial amount deposited in the policy.

Is it correct to assume that the gains (which would be taxable) are zero and no UK income tax is due? Should the payout amount received still be reported somewhere in the tax return?

The link  you provided primarily relates to single premium offshore life policies ( colloquially known as investment bonds). These are primarily unit linked investments with a basic life policy wrapped around them and are sold extensively in UK despite being ' foreign policies'.

These offshore investment bonds might produce a taxable gain liable to UK income tax on the policy holder if encashed during lifetime, or taxable on their estate if paid out as a death claim.

Both scenarios however, assume the policy holder was uk tax resident when encashment occurred.  Evidently your relative was not, so no basis for the proceeds to be taxed on the estate. Sometimes these policies are held in trust, but assume that this is not the case here.

As for your tax position as policy beneficiary by way of the proceeds,  you have no liabilty unless ownership of the policy was transferred to your legal ownership prior to encashment. I do not get the sense this happened in your case.

Thank you for the detailed response!  Unfortunately that link is the only related information that I could find in the HMRC website. Is there any other official source clarifying what represents a taxable gain in these cases? I do trust your view that there should be no tax liability in my case, just looking for some reference. I think that the policy produced some yearly interest while it was active, which was not reinvested in the policy itself, but paid out instead (not to me). 

Life policies by their nature, generally do not produce yearly  interest payable to policy holders. 

What was the name of the Insurance company and which foreign jurisdiction did it fall under?

 What you have described sounds more like a single premium policy withdrawal facility which permits up to 5% of the original capital to be withdrawn yearly. The name of the Insurance company should assist in  identifying  the type of policy you ultimately received a  benefit from.

I can confirm that this foreign life insurance policy produced yearly interest (although I don't know if that's the correct term in this case), which was paid to a beneficiary (again, not me). The original capital was not affected, that is, the yearly amount paid out was not withdrawn from it. Upon death of the policy holder, the payout that I received as a beneficiary corresponded to the original capital, unaffected by the yearly payouts. All I was trying to confirm is that this means that there are no taxable gains to report to HMRC in this case.

You will appreciate that in  the absence of any specific data (such as jurisdiction) I cannot offer a further opinion.

A policy from say a European insurer could have different attributes from say a North American or Canadian insurance policy, so vague reference to 'Foreign' gives me nothing to work with.

B1ng0

it's a European insurer, and the details/attributes of the policy are in my previous posts. I understand that it's a rather common type of policy, that pays out a yearly premium (or whatever it is called) based on the balance. I suppose this "premium" would represent a taxable gain if I was the beneficiary of it, but as I said I only received the payout corresponding to the initial amount deposited into the policy, and no other payments.

poseidon1

B1ng0 said:

it's a European insurer, and the details/attributes of the policy are in my previous posts. I understand that it's a rather common type of policy, that pays out a yearly premium (or whatever it is called) based on the balance. I suppose this "premium" would represent a taxable gain if I was the beneficiary of it, but as I said I only received the payout corresponding to the initial amount deposited into the policy, and no other payments.

Then full circle back to my original response.

 Since you were not the original policy holder or a beneficiary of a trust holding the policy ( the Europeans do not generally recognise the concept of UK trusts) or a legal recipient of the policy prior to its encashment  you have no UK tax liability on the cash you ultimately received and no taxable event to disclose or report to HMRC. 

For the benefit of others, generally speaking for a UK tax resident person to be personally exposed to potential UK tax on encashment of a single premium life policy, they will have to have received  from the insurer a chargeable event certificate ( or its equivalent) directly addressed to them as the policy 'owner' on the date of encashment.

 Inheriting policy proceeds cash in your circumstances which has passed through someone elses hands or estate, does not attach to it any of the taxable characteristics that  relate to its life policy origins. For you, in the UK it is 'clean' inherited cash.

B1ng0

My current understanding, based on the discussion above, is that for a beneficiary of a life insurance policy, UK tax would be due on gains (that is, any interest accrued on the initial lump sum), not on the lump sum itself. If there are no such gains (that is, no interest was added to the initial deposit and to the sum that you received), then no UK tax would be due.