Policyholder tax

For life assurance contracts, tax is payable on the chargeable gain = benefit - less total premium paid. In the case of part surrenders, the chargeable gain is calculated as:

• (partial) surrender benefit less
• the sum over all years t of P x 0.05 x t, where t is the time at which the policy is partially surrendered

So if the premiums were £10 p.a. and the policy is partially surrendered at time 3 then the second part of the equation (second bullet point) would be
(10)(0.05)(1) + (10)(0.05)(2) + (10)(0.05)(3)

Why is it calculated as above rather than just taking 5% of all premiums paid?

 

In this same section in chapter 5, it states that "surrender of bonus on a qualifying policy counts as a part surrender". Why is this not also the case for non-qualifying policies?

 

Oh, I see. Thanks, Lindsay.

I'm also hoping you may be able to help me with my other question:

 

Ok, great. Thank you, Lindsay.

 

Hi, yet another question from Ch 05 on Policyholder Tax.

Question 1

Section 2.2 states that the limit on premiums for qualifying policies is 3600 gbp. This is a rule for policies issued after 5 April 2013.

In a real world, my interpretation would be that the company would still accept larger premiums but would issue 2,3 etc policies - multiple records....A policyholder would then end up keeping several policies for smaller premiums to benefit from tax.

Is that correct?

Question 2

section 3.1 of the core reading "In the case of immediate annuities, they are often referred to as purchased life annuities to indicate that they are taken out at the discretion of the policyholder"

What does the discretion in this sentence indicate (ie. regarding taxaation)? The core reading goes on saying that the deferred annuities are treated as non-qualifying life assurance policies.

 

Thank you Lindsay. This makes sense as the tax limit applies per individual and works across all qualifying policies.

In which circumstances the company would set up multiple policies for tax reasons? I have read about this in chapter 1.

 

I think the core reading mentions something about tax treatment in product description (ch 1 and ch 2). I will find the detailed paragraph later on this evening.

Also, I have seen in practice that companies would create multiple records under one policy number when the policyholder buys more covers or his/her premiums increase. I was under impression that this is done for tax reasons i.e. it is more optimal to create additional "small policies" rather than one large record.

 

Hi Lindsay, the multiple records are set up for mortgage endowments in order for the policy to be qualifying. If policyholder has 1 limit for premiums why would a company set up multiple policies?

 

Back on the first question in the case of the partial surrender and the 5% thing.

The wording around chargeable gain is "less TOTAL premium paid" so just to clarify, this is much much less than total premium if it's 5% p.a. as above.

The original response confused me as this system is presented as a good thing but it's actually fairly little tax relief... Is that correct understanding and therefore the point is that if you're surrendering, you don't get much tax relief especially if it's early on?