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A qualifying endowment life assurance policy held for 10 years is only subject to basic rate tax which is paid by the insurance company, and has no tax implication, even for an individual higher rate taxpayer.
Unfortunately the tax position of endowment policies which fall outside the qualifying policy status is often misunderstood. A policy which is cashed in within ten years is no longer a qualifying policy. Policies associated with mortgages are sometimes cashed early on moving house, and sometimes as part of divorce arrangements. The assignment of a joint policy can give rise to a tax charge on the recipient, unless modified to a single life policy prior to divorce, and subject to FA2001, sch 28.
Any increase in value of a non qualifying policy over the premiums paid is a chargeable event and should be reported on a Self Assessment Tax Return. New regulations from April 2002 will require insurance companies to issue chargeable event certificates. Until then their issue has been usual but not compulsory, although a copy was always sent to the Inland Revenue.
A secondhand policy (see Links) is subject to capital gains tax as an investment, and a chargeable event arises on the policyholder when s/he obtains value for the policy, but without notification from the insurance company.
Many of endowment policies were sold to repay mortgages when inflation rates were higher than today. The lower investment return now being achieved has led to some policyholders increasing their premiums. To remain as a qualifying policy, one condition is that premiums in any one year must not be twice the premiums paid in any other, another is that the premiums in any one year must not be more that one-eighth of the total premiums due to be paid under the policy (TA 1988, sch 15, para 1(2)b). An increase above these limits will disqualify the whole policy. The mortgage may be repaid from the policy proceeds, but the policyholder may then have to fund a tax bill. An additional separate policy would probably avoid the problem.
If a qualifying policy is replaced by a new qualifying policy, it may be possible that no chargeable event arises on the earlier policy. (TA 1988, sch 15, para 20).
A chargeable event, which gives rise to higher rate tax payable when the policy gain is added to the taxpayers other income, is subject to top slicing relief. (TA 1988, s550).
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