How Are Chargeable Event Gains Taxed On Death?
By
HuutiMoney
If you wish to learn about how chargeable event gains are taxed on someone’s death, you will find detailed guidance in this blog post as we discuss how and when chargeable events gains are due, how tax is calculated on them and whether or not you can claim tax relief on certain types of chargeable event gains.
How Are Chargeable Event Gains Taxed On Death?
Chargeable event gains are generally taxed on someone’s death at the basic rate of 20%. However, further tax may be due from higher, or additional rate, taxpayers. The amount of chargeable gain is assessed against the executors and can be recovered by being paid through the value of the deceased’s assets.
According to section 484 of the Income Tax (Trading and Other Income) Act 2005, a chargeable event is one that leads to the application of income tax in relation to any gain from certain life policies, life annuities and capital redemption policies.
It is important to note that chargeable event gains are only applicable to non-qualifying policies such as single premium or additional premium life insurance policies; while qualifying policies are exempt from chargeable event gains and the levy of income tax as well.
Qualifying policies that are exempt from chargeable event gains are ones that fulfil the below-listed criteria:
- a minimum term of 10 years
- fairly even premiums
- premiums are paid at regular intervals, such as weekly, monthly or annually
However, HMRC recognises that a chargeable gain may have arisen due to investment over a number of years and may extend the option of “Top Slicing” to provide tax relief to qualifying cases.
How Is Tax On Chargeable Event Gains Calculated?
Tax on chargeable event gains is calculated on the basis of the deceased’s taxpayer status. For instance, if the deceased was a basic rate taxpayer the gains will be taxed at 20%. On the other hand, if an individual did not pay tax, there is no refund available.
In the event that the deceased was a higher-rate taxpayer, with income surpassing the required threshold, including the chargeable event, it becomes necessary to declare the event while finalising the deceased’s income tax return. The estate of the higher-rate taxpayer is responsible for paying the additional tax on the entirety of the chargeable gain.
However, if the deceased was a basic rate taxpayer, and the gain from the chargeable event resulted in them becoming a higher rate taxpayer, there is a possibility of reducing or eliminating the potential tax liability through top slicing.
How Do You Report Chargeable Events Gain For Tax Deduction?
To report chargeable events gain for a tax deduction, you would need to refer to the section ‘Gains from life insurance policies, capital redemption policies and life annuity contract’ using the supplementary pages of the Self Assessment: additional information SA101 form
Before reporting chargeable events gain for tax deduction it is important to identify situations that give rise to a gain. These include the following:
- if a policy is surrendered fully or partially and cash or other benefits are received
- if the policy matures or ends due to the death of the life insured
- if a UK policy or part of a policy is sold or assigned for value
- if the policy is a Personal Portfolio Brand (even if cash or other benefits were not paid during the year)
Can You Get Tax Relief On Chargeable Events Gain?
Yes, you can get tax relief on chargeable events gains in some cases. This is called a “Top Slicing Relief” and becomes applicable only in specific circumstances.
To be eligible for a Top Slicing Relief, it is essential to meet the following qualifying criteria:
- you are not a higher-rate taxpayer on your other income, excluding the gain; but the addition of the gain makes you a higher-rate taxpayer
- you are not an additional rate tax on your other income, excluding the gain; but the addition of the gain makes you an additional rate taxpayer
There are also other ways to pay less taxes on the money you make from selling certain assets. One way is to hold onto those assets for more than 3 years before selling them. This means you’ll only have to pay taxes on the profit you make after 3 years.
Another way to pay less taxes is to give those assets to your family before you pass away. This will make your estate worth less, so your family won’t have to pay as much inheritance tax.
Conclusion:
Chargeable event gains pertain to the profits acquired from the disposal of assets, which can encompass a wide range of properties from physical real estate to company shares and investments in various forms. These gains are liable to taxation, regardless of whether the asset was sold or disposed of through other means.
References:
Dealing with investments after the death of an investor