Tax on a surrendered life policy

[staffordian]

I'm trying to help someone who has a couple of questions about a life policy he has had to surrender, and it's not something I've had much experience with, so wondered if my interpretations are correct or not.

The policy is described as a 'Lifetime Account Policy', which means nothing to me.

It was taken out around 1989, with a monthly investment (premium?) of £54, so around £19440 has been paid in.

Circumstances meant it had to be surrendered, and the company quoted a fund value of £41298.17 but the amount received was £39929.59.

First question, is a deduction/penalty for surrender of over £1300 or about 3.3% typical? He has asked for details of how this difference is calculated but despite several exchanges of letter no answer has been forthcoming. I have asked him if he has the original t&cs and this might throw light on it, but in the meantime, an idea of whether it seems reasonable or not would be useful. My suspicion is that this sort of size of deduction is not unusual.

Secondly, a question on the tax implications of this surrender.

From what I can find, this is classed as income rather than capital gain. Again, is this usually the case?

And as far as liability is concerned, there is a Chargeable Event Certificate which states, among other things, the following information:

Chargeable event and income details
Type of event - Surrender
Date of event - 19/2/2019
Number of years - 28
Amount of gain rounded down - £22178


Income Tax. Treated as Paid? Yes
Amount of tax treated as paid rounded up £4436

I see that the £4436 is 20% of the £22178.

Does the above imply, as I believe, that the proceeds have been paid out net of basic rate tax, and that the recipient has no further tax liability unless he falls into the highr rate tax bracket as a result of this income, which may well be the case?

There is a letter with the certificate which suggests this, but says any tax due because of being in a higher tax bracket might be reduced or removed by a relief known as top slicing, to spread the gain across a number of tax years.

Is this likely to be applicable, and if so, how does it work, and how does one go about getting it?

Many thanks for any help with this.

Staffordian

[PinkDalek]

Yes, it is complicated and you may wish to read http://www.hmrc.gov.uk/manuals/iptm/IPTM3527.htm

Assuming the taxpayer completes a Tax Return, the relevant form is SA101, I think under the section entitled Gains from life insurance policies, capital redemption policies and life annuity contracts.:

https://assets.publishing.service.gov.u ... 1_2019.pdf

The explanatory notes should be here https://assets.publishing.service.gov.u ... _2019_.pdf

I think the top slicing would be automatic but it is many years since I had a similar problem!

[Dod101]

https://www.gov.uk/government/publicati ... -helpsheet

You might find that this link is more relevant as it specifically covers top slicing. It may or may not be relevant to your case. If the holder is a basic rate taxpayer only then no further tax should be due but he still has to fill in the relevant bit on the self assessment return.

As to deductions by the insurers, it is or used to be common if a surrender took place in the early years of a policy but this policy has been going for 30 years. If we knew the insurer it might help as some are a bit more cavalier than others about deductions.

Dod

[Alaric]

If we knew the insurer it might help as some are a bit more cavalier than others about deductions.

Thirty years ago, there were some product designs which took a "now you see it, now you don't attitude" towards how many units you notionally held. What you might find is that the stated number would only be payable on the death of the policyholder, with a lower amount, depending on age, payable on surrender. That's assuming it to be investment linked. If it's "with profit", a market value adjustment may have been applied.

[Dod101]

Alaric

Yes that is the expression I was looking for. 'Market value adjustment'. I doubt that the OP or his friend will be able to do much about that.

Dod

[staffordian]

Many thanks for the help and the links, they will be very useful. I shall pass them on.

The company is ReAssure Ltd, who I have never heard of.

[Alaric]

The company is ReAssure Ltd, who I have never heard of.

It think it once used to be called Windsor Life, but it's now part of Swiss Re who are big in the behind the scenes world of reinsurance.

https://www.reassure.co.uk/about-us/why ... ur-policy/

Why we might have your policy

We’ve bought blocks of business from several providers over the years, including Guardian Financial Services, HSBC, Barclays Life, Alico and National Mutual

So ReAssure is a lesser known "zombie", in the same line of business as Phoenix, Chesnara and Aviva to an extent.

[Dod101]

And the policy owner may rest assured that Swissre is a well capitalised and secure reinsurance company. The trouble with these 'zombie' companies is that since they no longer sell policies in these funds, they have no incentive to be very competitive.

BTW, there are very few true 'zombie' companies nowadays, certainly in the quoted sector. Those mentioned by Alaric all also conduct current insurance sales. That is not relevant to the current query though.

Dod

[PinkDalek]

Many thanks for the help and the links, they will be very useful. I shall pass them on.

My apologies that I picked up the wrong link from the tabs I had open late last night (which concerned the intricacies of the treatment of rebated commission).

As Dod101 said, the more relevant one is:

HS320 Gains on UK life insurance policies (2019)
https://www.gov.uk/government/publicati ... icies-2019

Even then, I don't think they manage to explain how top slicing actually works - unless one delves into https://www.gov.uk/hmrc-internal-manual ... l/iptm3000 (which I haven't done).

As I said earlier it is complicated - perhaps the example half way down here https://www.pruadviser.co.uk/knowledge- ... ief-facts/ may assist the former policyholder. It very much depends on the individual's personal tax position, as you mention the chargeable event may push him/her into the higher rate bracket.

In my case, I've now looked back, I was granted top slicing relief of 2p but that was due to various other matters arising in that tax year, outside my control, such that the relief was worthless to me. Hopefully the individual concerned will benefit more substantially than I did! Top slicing is there to benefit an individual in such a situation - normally a basic rate taxpayer, save for the event.

There may be steps whereby the taxpayer might gain further relief generally. Expanding the basic rate band by making early Charitable donations in 2019-2020, to be claimed in 2018-19 on submission of the Tax Return, may be worth investigating.

I don't think anyone has said it yet but your OP had a number of queries in it and you appear to have a good grasp as to what you wrote.

[staffordian]

Many thanks for the help and the links, they will be very useful. I shall pass them on.

My apologies that I picked up the wrong link from the tabs I had open late last night (which concerned the intricacies of the treatment of rebated commission).

As Dod101 said, the more relevant one is:

HS320 Gains on UK life insurance policies (2019)
https://www.gov.uk/government/publicati ... icies-2019

Even then, I don't think they manage to explain how top slicing actually works - unless one delves into https://www.gov.uk/hmrc-internal-manual ... l/iptm3000 (which I haven't done).

As I said earlier it is complicated - perhaps the example half way down here https://www.pruadviser.co.uk/knowledge- ... ief-facts/ may assist the former policyholder. It very much depends on the individual's personal tax position, as you mention the chargeable event may push him/her into the higher rate bracket.

In my case, I've now looked back, I was granted top slicing relief of 2p but that was due to various other matters arising in that tax year, outside my control, such that the relief was worthless to me. Hopefully the individual concerned will benefit more substantially than I did! Top slicing is there to benefit an individual in such a situation - normally a basic rate taxpayer, save for the event.

There may be steps whereby the taxpayer might gain further relief generally. Expanding the basic rate band by making early Charitable donations in 2019-2020, to be claimed in 2018-19 on submission of the Tax Return, may be worth investigating.

I don't think anyone has said it yet but your OP had a number of queries in it and you appear to have a good grasp as to what you wrote.

Many thanks PD. I'm passing on the information, which, rather reassuringly is more or less what I had worked out. He does have an online tax account, so I'm suggesting he completes that sooner rather than later, mainly so he can see the result of any top slicing relief, because trying to find out how it works and how it's calculated seems a rather daunting task!

Thanks again to all those who have helped. He has a few problems to deal with at the moment so at least this one can now be crossed off his list

[stewamax]

HMRC’s description of how top-slicing works leaves a bit to be desired. And for 2018-19 tax year at least, HMRC calculated it wrongly for many people who were claiming the starting rate and personal investment allowances (the notorious exclusion #81).

The calculation has three main steps. The starred figures will have been provided by the insurance company on surrender

a. work out tax liability including the chargeable gain*, and deduct the notional tax* on the gain (‘treated as paid’)

b. work out the what the tax liability would have been completely ignoring the chargeable gain and the notional tax

Subtract b. from a. This gives the net tax attributable to surrendering the policy assuming that all the tax was liable in a single year. Call this Lump Sum tax.

Now assume that instead of the gain and notional tax being liable in a lump sum all in one year, they had been spread over the life of the policy. So divide the gain and the notional tax into annual slices. If the ‘complete years’* is say 20, divide both the gain and the notional tax by 20.

c. work out tax liability including just one annual slice of the chargeable gain*, and deduct one annual slice of the notional tax on the gain.

Subtract b. from c. This result gives the net tax which would have been liable due to the policy in a typical one of any of the previous 20 or whatever years, assuming that other income and tax rules were the same as in the present year.
Now multiply the result by the number of complete years. You now have a ‘fairer’ version of the tax liability as the gain and notional tax have been spread over many years instead of just one.

Finally, subtract this Fairer tax from the Lump Sum tax above. This gives the top-slicing relief.

For anyone who has a ‘reasonable’ income but does not normally pay HRT except when having a chargeable gain such as this, the Fairer tax is often zero since the notional tax fully covers the liability. The top-slicing relief is then just the Lump Sum tax.

And I am open to correction from those who really understand it!

[staffordian]

HMRC’s description of how top-slicing works leaves a bit to be desired. And for 2018-19 tax year at least, HMRC calculated it wrongly for many people who were claiming the starting rate and personal investment allowances (the notorious exclusion #81).

The calculation has three main steps. The starred figures will have been provided by the insurance company on surrender

a. work out tax liability including the chargeable gain*, and deduct the notional tax* on the gain (‘treated as paid’)

b. work out the what the tax liability would have been completely ignoring the chargeable gain and the notional tax

Subtract b. from a. This gives the net tax attributable to surrendering the policy assuming that all the tax was liable in a single year. Call this Lump Sum tax.

Now assume that instead of the gain and notional tax being liable in a lump sum all in one year, they had been spread over the life of the policy. So divide the gain and the notional tax into annual slices. If the ‘complete years’* is say 20, divide both the gain and the notional tax by 20.

c. work out tax liability including just one annual slice of the chargeable gain*, and deduct one annual slice of the notional tax on the gain.

Subtract b. from c. This result gives the net tax which would have been liable due to the policy in a typical one of any of the previous 20 or whatever years, assuming that other income and tax rules were the same as in the present year.
Now multiply the result by the number of complete years. You now have a ‘fairer’ version of the tax liability as the gain and notional tax have been spread over many years instead of just one.

Finally, subtract this Fairer tax from the Lump Sum tax above. This gives the top-slicing relief.

For anyone who has a ‘reasonable’ income but does not normally pay HRT except when having a chargeable gain such as this, the Fairer tax is often zero since the notional tax fully covers the liability. The top-slicing relief is then just the Lump Sum tax.

And I am open to correction from those who really understand it!

Wow, many thanks for such a detailed explanation. I have his figures so will work through it and see how it comes out.

I much appreciate the time and effort you've taken. A 'thanks' is sometimes just not enough!

[MyNameIsUrl]

... I have his figures so will work through it and see how it comes out...

You may find the following useful to check your calculations. It is an excel spreadsheet which you can download free:

http://www.sa2000.co.uk/saol.htm (click ‘Download the Individual tax return software for 2018-19’)

Like your friend, I surrendered a life policy in 2018/19, and I had top-slicing relief. I filled all the details into this spreadsheet and the results matched exactly the calculations on the HMRC self-assessment form.

[staffordian]

... I have his figures so will work through it and see how it comes out...

You may find the following useful to check your calculations. It is an excel spreadsheet which you can download free:

http://www.sa2000.co.uk/saol.htm (click ‘Download the Individual tax return software for 2018-19’)

Like your friend, I surrendered a life policy in 2018/19, and I had top-slicing relief. I filled all the details into this spreadsheet and the results matched exactly the calculations on the HMRC self-assessment form.

That's really useful, thanks very much!

[stewamax]

You may find the following useful to check your calculations. It is an excel spreadsheet which you can download free:
http://www.sa2000.co.uk/saol.htm (click ‘Download the Individual tax return software for 2018-19’)
Like your friend, I surrendered a life policy in 2018/19, and I had top-slicing relief. I filled all the details into this spreadsheet and the results matched exactly the calculations on the HMRC self-assessment form.

Worth noting that third-party SATR package suppliers have to validate their systems against a 'master' version supplied by HMRC, and for the 2018-9 tax year HMRC's system produced the wrong results when the tax-payer was claiming the starting rate and personal investment allowances and top-slicing relief. Tax-payers had to submit such SATRs on paper and, for those tax-payers who asked HMRC to calculate their tax liability, HMRC managed even to get the calculation wrong (and unfortunately not in the tax-payers favour!)

[PinkDalek]

Worth noting that third-party SATR package suppliers have to validate their systems against a 'master' version supplied by HMRC, and for the 2018-9 tax year HMRC's system produced the wrong results when the tax-payer was claiming the starting rate and personal investment allowances and top-slicing relief. ...

If I may, your previous thread on the subject viewtopic.php?p=193547#p193547 suggested your problem was with 2017/18.

Exclusion 81 still appears on the 2018/19 (as at 25 April 2019) listing:

Self Assessment Individual Exclusions for online filing - 2018/19 (Version 1)
https://assets.publishing.service.gov.u ... v-v1.0.pdf

The Workaround states:

The Exclusion no longer applies but in these circumstances a paper return can still be filed if developers have not been able to remove from their products

Tim Good has written to HMRC as follows:

Exclusion 81. It sets an extremely dangerous precedent to allow users of some (errant) but not other software packages to file paper returns on the basis of an error in the developer’s inhouse calculation of tax. The exclusions list should be exclusively for cases where the HMRC calculator is thought to be in error, not where commercial software is in error but the HMRC calculator is correct. At the very least, the errant software developer products should be identified and customers told that the normal late filing penalty will apply if paper returns are filed after 31 October. Alternatively, the exclusion should be removed altogether.

Source: https://ion.icaew.com/taxfaculty/b/webl ... 19-returns

Also see his reference to Marina Silver [2019] UKFTT 0263 (TC).

[stewamax]

Thanks PD.
Yes, my previous thread on the subject viewtopic.php?p=193547#p193547 was indeed with a problem in 2017/18 tax year.
But my experience with 2018-19 SATR appear to show that HMRC is still getting the calculation of top-slicing relief wrong in some circumstances (where the order in which investment allowances are applied benefits HMRC rather than the taxpayer). Exclusion #81 may officially have retired, but a variant has reappeared in a different guise in new exclusion #101
And the tax-payer I was helping is still waiting for a correct calculation of her 2017-18 relief !.

The underlying problem lies not, of course, with the basic principle of calculating top-slicing relief per se but that to get the correct result one needs to work with an otherwise complete and correct assessment that has allowances given in the correct order.

[stewamax]

In the Silver appeal, tribunal judge Barbara Mosedale gave a model explanation of the gist of what has been happening with these various exclusions (#81, and now #101 and #102):

31. ....Parliament’s intent with top slicing relief was obviously to allow a person who has taken income over a number of years to have relief when provisions taxed them to the entire income in a single year, as here. The relief was intended to make the tax liability approximate to what it would have been had the income been taxed in the year it was actually received. So when carrying out the hypothetical tax calculation it made every kind of sense that the taxpayer should be treated as entitled to the reliefs that that hypothetical income would have entitled her to.

32. HMRC’s interpretation, on the other hand, is clearly inconsistent with Parliament’s presumed intent. HMRC’s interpretation would result in someone who was a basic rate taxpayer in the year of realisation and who would not have had any higher rate tax to pay on the withdrawals from the bond had it been taxable year by year, nevertheless having to pay higher rate tax on the entire gain. Top slicing relief would be denied to those it was intended to help

[above quoted text is Crown copyright; my italics]

[PinkDalek]

Exclusion #81 may officially have retired, but a variant has reappeared in a different guise in new exclusion #101
And the tax-payer I was helping is still waiting for a correct calculation of her 2017-18 relief !

Would your advice for the person the OP is assisting be to file on paper and then chase and chase?

[staffordian]

I've passed on the information kindly given in this thread and his initial reaction is to contact HMRC and ask them if he will be required to complete a return for 2018-19. He has an online account but since retiring a few years ago has not been required to submit one (he has no state pension yet, just an occupational pension taxed at source. Basic rate only, so very straightforward).

He assumes that as HMRC will have a copy of the certificate, they will know if it will result in additional tax liabilites. Not sure if this is the best plan, but presumably if they say he doesn't need to complete one, that's fair enough?

I looked at the spreadsheet linked to by MyNameIsUrl last night and plugged in some figures, but didn't get time to finish it. I plan to look again tonight to see how it pans out. However I'm a bit confused by these exclusions that seem to be causing problems.. Are they likely to be an issue where the only sources of income are one pension and this redeemed policy, plus, perhaps some interest on non ISA savings? I'm picking up that problems occur where this top slicing relief is combined with other reliefs. Is that correct?

Thanks!