What tax will apply on the gains from my mortgage endowment plan?

Published by Lisa Vaughan on 11 May 2018.
Last updated on 11 May 2018

Q

I have a Midland Bank [now part of HSBC] mortgage endowment plan maturing this September. It is a single life plan with all premiums paid to date and is expected to yield a profit of about £13,200. I wondered if this will be taxable and, if so, what tax will apply and how do I calculate it? I am a basic-rate taxpayer. Any help would be much appreciated.

From:
IP/Castleford

A

It is easy to be confused about the taxation of gains on life insurance policies, as the rules are complex and vary from one type of policy to another.

Generally speaking, the gains on a ‘qualifying’ policy are not taxable. However, the gains on a ‘non-qualifying’ policy could be subject to higher and additional rates of income tax.

Whole-of-life insurance contracts, endowments and single premium investment bonds are examples of policies that would be categorised as having a qualifying or non-qualifying status. Most policies are likely to have a qualifying status. To confirm your policy status, you should contact your life insurance company.

These are the main conditions for a policy to qualify:

  • It has a minimum policy term of 10 years.
  • It has a broadly even spread of premiums, payable at least once a year.
  • Originally for endowment policies, and from 1976 for term and whole-of-life policies, it has a minimum sum insured equal to 75% of the premiums payable for the duration of the contract.

Policies that are outside these parameters are likely to be nonqualifying.

The gains or profits made on non-qualifying policies are often referred to as chargeable gains, which are subject to income tax rather than capital gains tax.

A chargeable gain arises on a non-qualifying policy on certain events such as on maturity, surrender, partial surrender or death. For example if the amount paid out on maturity exceeds the premiums paid, the gain is taxable.

If a chargeable gain has arisen, a UK basic-rate taxpayer will not pay any additional income tax, unless the gain when added to other income pushes the total income into the higher-rate tax band. In 2018/19, higher-rate tax is payable on earnings over £46,351 a year.

If higher-rate tax is payable on a chargeable gain arising from an insurance policy, ‘top-slicing relief’ may be available. This calculates the ‘annual equivalent’ gain by dividing the total gain by the number of complete years from the start of the policy.

If you are in receipt of age-related allowances or tax credits, or have an income in excess of £100,000 a year, you should be aware that when a chargeable gain is added to your income this could have a negative impact on your allowance and tax credits.

I would advise you to seek advice from a professional financial adviser before realising any chargeable gains, to ensure that you will not be negatively impacted.

Lisa Vaughan is a chartered financial planner at Fogwill & JonesFind out who our experts are on the Ask the Experts homepage.

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