Muras Matters: Chargeable Event Gains

Chargeable Event Gains

Life Insurance Bonds

There is a common misconception that the proceeds from certain life insurance policies, such as investment bonds, are tax free. It is true that 5% can be withdrawn from the policy each year generally without any income tax implications, but any excess over 5% triggers a ‘Chargeable Event’ with potentially serious tax implications.

When the policy is finally surrendered, any profit would normally be tax free for a basic rate income tax payer due to a 20% tax credit received with the bond, however the additional income may take the tax payer into the higher rate of income tax. A higher (40%) or additional (45%) rate tax payer would have additional tax to pay and in certain circumstances it is possible for the tax liability to exceed 100% of the income actually received from the policy.

Offshore Bonds

Offshore bonds are similar to Life Insurance Bonds but with an important distinction, these bonds don’t have a 20% tax credit. Therefore basic rate tax payers will have a tax liability when the policy is surrendered, as well as higher and additional rate payers.

A Word of Warning

A recent court case demonstrated the risks of not taking professional advice, where a taxpayer made withdrawals from life insurance policies in order to purchase a house. It came as a surprise when HMRC applied an effective tax rate of 779% on the actual income received from the policy. The taxpayer had to apply to court for rectification of the mistake made and he was very fortunate that the judge agreed, meaning that the tax liability was removed. If advice has been taken at the outset, then this might have been avoided.

It is essential therefore that the tax implications of drawing income are considered in detail before any action is taken in connection with such investments. This is not only to ensure there are no costly surprises but also to plan how any tax liability may be mitigated.

If you have any questions about the tax implications of investing in financial products or other investments then please contact our Tax Director, Jenny Marks. If you want advice on the type of products available then we can arrange an appointment with an independent financial advisor.

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