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UK tax – Chargeable Events and LPRs

UK tax assessment process where chargeable events occur following the death of the policyholder (or last policyholder for jointly held bonds). This applies only where the policyholder was not a trustee.

What happens when a policyholder (or the last policyholder for jointly held bonds) dies?

The bond will form part of the deceased policyholder’s estate. On obtaining a UK grant of probate (or jurisdictional equivalent)*, the executors of the deceased’s Will (or the administrators of the deceased’s estate on the granting of letters of administration where the policyholder died intestate) become the new policyholder. Executors and administrators are known collectively as legal personal representatives (LPRs).

* Please note that insurers may stipulate that probate is required for the jurisdiction governing the law of the contract in order to note the change of legal ownership. For example, Old Mutual International contracts are subject to Manx Law therefore Isle of Man probate may be required.

When the policyholder is the sole life assured, the bond will terminate on the death of the policyholder. This is a chargeable event.

Who is assessed for income tax when the policyholder dies?

Chargeable gains will only occur on triggering a chargeable event. These are death of the last life assured (for a life assurance policy) or maturity of the bond (where applicable), full or part encashment (including making policy loans), or on assignment of the bond for money or money’s worth.

Who will be assessed will depend upon the event that occurs.

If the policyholder's death brings the policy to an end the gain will be assessed on the deceased policyholder.

Any chargeable gain arising after the policyholder's death will be assessed against the executors (or administrators). They do not have a personal allowance to offset income tax, but all chargeable gains are liable to income tax at 20%. The LPRs can recover the cost of paying this tax from the value of the estate.

Reliefs available to LPRs

Top-slicing relief and deficiency relief are not available to LPRs. However, time apportionment relief may apply.

The legislation dealing with time apportionment is found under section 528 in Chapter 9 of Part 5 of the Income Tax (Trading and other Income) Act 2005; and subsection (1) states that ‘the gain from a foreign policy of life insurance or foreign capital redemption policy is reduced for the purposes of this Chapter if the policy holder was not UK resident throughout the policy period’.

The use of the word ‘policyholder’ in this context has been the source of much debate. Since the legislation simply refers to ‘policyholder’ (which is not defined for the purposes of Chapter 9) it is Old Mutual International’s view that ‘policyholder’ means all policyholders and therefore time apportionment can be used in respect of any policyholder who has owned the bond.

Example

Mr Hall is resident in Hong Kong. Mr Hall is the policyholder of a Managed Capital Account (MCA) held with Royal Skandia.

Mr Hall dies and the legal ownership of the bond passes to Mrs Hall (who is a UK resident) as his Legal Personal Representative. Mrs Hall then subsequently surrenders the bond to distribute the proceeds to Mr Hall’s beneficiaries whereupon there is a chargeable gain of £20,000.

This gain can be reduced by using time apportionment based on the number of days that Mr Hall was non-UK resident whilst also the policyholder.

In determining the reduction of the gain, the calculation is as follows:-

Gross gain (£20,000)

X

Number of days resident in the UK (Mrs Hall = 200 days)

= Net gain (£4,000)

   

___________________________

 
   

Number of days bond has been in force (1000)

 

What happens when a policyholder dies and there is a valid beneficiary nomination or trust in place?

For Beneficiary Nominations

On death of the policyholder, the legal and beneficial ownership of the bond passes to the nominated beneficiary (or beneficiaries jointly), therefore where the contract continues after the death of the policyholder, the nominated beneficiary (or beneficiaries) become the new policyholder(s).

As the beneficiary is now the policyholder, any chargeable gains that occur when they are policyholder will be assessed against their individual taxable income. Where there is more than one beneficiary, the chargeable gains are split equally between the beneficiaries for assessing and paying income tax.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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