Tax on endowment payout

nickbar

Just wondering if anyone has thoughts on the following:-

I requested an cash-in estimate on my endowment policy as I'm switching mortgages to a repayment one. On the letter I received from the endowment company it mentioned that I may have to pay tax. I presume this is because this money is classed as income? Is there anyway to avoid this?

Regards

dunstonh

If you have a chargeable event, it can leave you liable for higher rate tax.

Best way to avoid it is not to create a chargeable event or not be a higher rate tax payer or be close to being a higher rate tax payer.

MPwannasavemoney

I think the tax is charged on the gain ie the difference between what the policy is worth and what you have paid in premiums. Some policies are treated as though basic rate tax has already been deducted so if you are a higher rate tax it is not 40% tax you pay but a smaller figure. Your endowment company can tell you how much gain you have made and whether you can treat any as already tax paid at the basic rate.

I have a similar question - can I transfer my endowment to my wife who is not a tax payer and thus not pay the tax? Clearly she gets the cash then but its all going into doing up the bathroom in the house.

dunstonh

Sorry to correct your MPwannasavemoney but that is incorrect. If a chargeable event occurs, you are looking at the following.

higher rate tax payers

The profit (chargeable event) is subject to Income Tax at the marginal rate, which is the difference between higher and basic rate tax (40%-22%=18%) as at April 2001. Tax is applicable to the maturity figure less all premiums paid since inception of the policy.

basic rate tax payers

The proceeds will be tax-free to basic rate tax payers. Marginally higher rate tax payers will probably have to pay some tax, but will benefit from a complex mitigation opportunity known as "top slicing".

In simple terms 'top slicing' allows the actual gain to be divided by the whole number of tax years the investment has been held. This figure is then added to your taxable income for the year in which the policy matured and according to where the "slice" straddles various tax bands, a proportional tax rate is the applied to the whole real gain etc. etc. Do not rely on this truncated definition of top slicing - You should discuss top slicing with an accountant because it is complex.

I have a similar question - can I transfer my endowment to my wife who is not a tax payer and thus not pay the tax? Clearly she gets the cash then but its all going into doing up the bathroom in the house.

no. If you do not create a chargeable event, then the maturity is free of tax, regardless of tax status.

MPwannasavemoney

OK I was almost right.

re - creating a chargeable gain - well this happens when you cash in the policy which is what I want to do. So I have some gains an I'm a higher rate tax payer so some tax is due. Can I legally avoid this by transferring to my wife before cashing in?

dunstonh

re - creating a chargeable gain - well this happens when you cash in the policy which is what I want to do. So I have some gains an I'm a higher rate tax payer so some tax is due. Can I legally avoid this by transferring to my wife before cashing in?

If the policy is surrendered within the first 10 years or 75% of the term if sooner, there the gain could be liable to income tax as this is a chargeable gain. There will only be a chargeable gain if the surrender value exceeds the total premiums paid and then only if the policyholder is a higher rate taxpayer after the top-sliced gain is added to the income. The gain will attract a charge of 18%, this being the difference between higher rate and basic rate tax.

So, if you have gone longer than 10 years on the policy, there is no chargeable gain. If there is a chargeable gain then a joint policy can be split but the policy cannot be transferred. Not without creating a chargeable event anyway, which is what you are trying to avoid. Hopefully, you would have past 10 years so it wont be an issue.

edit: P.S. I hate chargeable events and top slicing!!! - so bloody awkward to explain and calculate.

MPwannasavemoney

I've gone longer than 10 years, I think it is 20 now. Not sure about the 75% of the term bit though - I'll have to see what the term was. Anyway I had asked to cash in the policy but stopped when the insurance company told me I'd be liable for higher rate tax. Re transfers I thought transfers between husband and wife were exempt from tax - or is that only for capital gains tax?
Re topslicing - where can I find out more - not sure it will help me though as I've been a higher rate tax payer for at least 15 years.

dunstonh

Because of the 10 years passed, you have qualified to surrender without tax liability. So ignore top slicing.

Re transfers I thought transfers between husband and wife were exempt from tax - or is that only for capital gains tax?

The product (tax wrapper) itself doesnt allow direct transfers like some other products (tax wrappers). So its a limitation of the product rather than the tax position.

However, all that is not yours to worry about as you have gone past the 10 year mark.

yvie_2

Hi there

Just wondering is the tax deducted BEFORE they send the money to you or do you have to declare it? My husband has just won compensation for an under paid endowment and we were wondering if he has to declare it as income?

Many thanks
Yvie

dunstonh

If its interest that has been taxed, its done at source at the standard 20%. Higher rate tax payers would need to disclose it as per usual.

If its because of a chargeable event, you need to disclose it on your tax return, if applicable. I believe there is a box to put it on the tax return.

yvie_2

many thanks for that

Yvie