Do You Have To Pay Tax To HMRC On An Endowment Policy?
By
HuutiMoney
If you are wondering whether or not you have to pay tax to HMRC on an endowment policy, you will find the answer to your question in the following blog post. In addition to this, you will also find detailed guidance regarding situations in which endowment policies may or may not be taxable. In the end, there is an explanation regarding the qualifying criteria to make an endowment policy a qualifying policy with returns at maturing remaining tax-free.
Do You Have To Pay Tax To HMRC On An Endowment Policy?
Yes, you have to pay tax to HMRC on an endowment policy in the following situations:
- the policyholder surrenders the policy before it matures
- the policyholder sells the policy to someone else
- the policyholder dies and the policy is in force
In the first case, if the policyholder gives up an endowment policy before it matures, they should expect to be taxed on any gain that they make from surrendering the policy.
This gain is generally calculated as the difference between the amount of money you receive from surrendering the endowment policy and the total amount of premiums that you would have paid over the years.
In the second case, if you sell the policy to someone else, (assuming that it is under a gain) you will have to pay tax on the gain that you make by selling the endowment policy.
The gain is calculated in the same way as surrendering an endowment policy; by calculating the difference between the amount you receive from the sale of the policy and the amount that you would have paid through cumulative premiums over time.
In the third case, if the policyholder dies and the policy is still in force, the proceeds of the policy will be paid out to their beneficiaries. In this situation, if the policy makes a gain, the beneficiaries will be liable to pay tax on that gain.
When Do You Not Have To Pay Tax To HMRC On An Endowment Policy?
If you are taking out an endowment policy under the following situations, you will not be liable for paying tax to HMRC:
- it is a qualifying policy
- the policy was taken out before 1984
- the policy was taken out for a certain purpose
To meet the first condition for tax relief, an endowment policy must be a qualifying policy. This means the following:
- a qualifying policy should have been held for a minimum period of 10 years
- it should be a life assurance policy
- it should not be a linked investment policy
To meet the second condition for tax relief, an endowment policy should have been taken out before 1984. In this case, you may be exempt from paying tax on the gain’ despite not having held the policy for 10 years.
In the case of the third condition, an endowment policy must be taken out for certain purposes, such as education or retirement, so that you may be exempt from paying tax on the gain.
How Can You Make Sure That Your Endowment Policy Is A Qualifying Policy?
If you want to make sure that your endowment policy is a qualifying policy and you are not liable for paying tax when it matures, you will have to make sure that the policy meets the below-listed criteria:
- the policy term is a minimum of ten years
- the policy requires that premiums are paid yearly or more frequently
- the policy should be issued by a UK company; if not, it must be issued through a UK branch or permanent establishment of an overseas resident insurer
- policies that are issued or varied from 21 March 2012, should have annual premiums payable equal to or less than £3,600
In addition to this, for an endowment policy to be classified as a qualifying policy and remain tax-free on maturity, it is essential that premiums paid in any 12-month period must not exceed the following conditions:
- double the amount of premiums in any other 12-month period
- one-eighth of the total premiums paid for 10 years or the specified term of the policy
In such cases, it is best to seek the advice of a policy expert. If you are looking to invest in an endowment policy, you may consider seeking the services of investment advisors such as Aviva or Bankrate.
Conclusion:
The above discussion helps to conclude that whether or not an endowment policy is taxable or not depends on the conditions that it meets. While some endowment policies qualify as tax-free on maturity, others may not. In this case, the most essential aspect of determining whether or not you have to pay tax on an endowment policy is the policy being able to meet the requirements of a qualifying policy.
References:
Will I have to pay tax on my endowment policy? It is maturing soon. | This is Money