Tax Liability on Withdrawing Funds from a Flexible Protection Plan

AllAtSeaAgain

I have a Life and Critical Illness whole of life Flexible Protection Plan (life and critical illness assurance with an investment element) which commenced in September 1999. It is in the joint names of myself and my wife. We have paid monthly premiums of £115.69 for the first 25 years, reduced to £76.68 for the last 2 years. It provides £90,000 of life and critical illness cover on a joint-life first-death (or diagnosis of a critical illness) basis and has a current cash-in value of just over £37,000, with the ability to withdraw part of that sum at any time whilst retaining the life and critical illness cover (subject to the monthly premiums continuing to be paid). We are looking to withdraw £30,000 from the plan. Are there any tax implications (i.e. income tax or capital gains) and if so how do I work out what these would be? I have tried searching for answers on the HMRC website but simply cannot figure it out. My wife is a higher-rate tax payer in full-time employment and I am a standard rate tax-payer in part time employment.

LITRG

Hello AllAtSeaAgain,

We have some basic guidance on the tax implications of life insurance-type investments: https://www.litrg.org.uk/savings-property/tax-savings-and-investments/life-insurance-policies

I hope this helps point you in the right direction.

poseidon1

I assume this is a unit linked policy with an obvious investment element.

As any 'policy gain' within the £37,000 partial surrender will be caught by the "chargeable event' tax regime and potentially liable to income tax depending on your individual marginal rates of tax.

You could get the life company to give you an estimate of the likely policy gain, prior to you initiating the surrender to allow you to do a back of envelope calculation of any income tax exposure, allowing for top slicing relief - See the worked example in the article below -

https://www.yourhomefinance.co.uk/tax-on-surrender-of-life-insurance-policy-uk-calculator

AllAtSeaAgain

Thanks. The total premiums paid over the 27 years come to £36,547, so based on the info in the above article, even if I took the full cash-in value, the gain (and therefore the tax liability) would be appear to be minimal - is that how it would work?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82160773#Comment_82160773

The premiums you paid do not wholly relate to the investment element of the policy. There is the cost of the life cover and critical illness elements that are not part of the equation when considering the 'profit' element in the surrender proceeds and you are most unlikely to be able to calculate for yourself what those costs were.

Therefore you cannot know or calculate for yourself the extent of that partial surrender profit ( ie the chargeable event gain), without the life company telling you what it is.

In this regard therefore it seems you did not properly comprehend what you read.

You could of course proceed with the encashment and then see the actual level of the chargeable event gain attributable to you both - the life company will supply a certificate to that effect.

However be warned if either you or your wife are already higher rate tax payers before policy gains are taken into account, top slicing relief would not then apply to mitigate any income tax exposure.

The insurance policy gains tax regime is quite complex, the article gives a thumbnail overview with a single worked example, it by no means provides exhaustive coverage of the subject.