Autumn StatementNov 23 2016

Life insurance policy taxation overhauled

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Life insurance policy taxation overhauled

The government will tackle disproportionate tax charges that sometimes arise from life insurance policy part-surrenders and part-assignments.

There are two ways in which a customer can withdraw money from an investment bond; they can either make a partial withdrawal from all policy segments or they can do a complete closure of individual policy segments. 

The way a customer is taxed in each scenario can be significantly different, and often the customer is unaware of the implications.

As a general rule of thumb, it may be more tax efficient to withdraw money (over and above the annual 5 per cent allowance) through surrendering individual policy segments rather than taking the money through a partial surrender across all policies.  

However, each case needs to be reviewed on its own merits.

My only reservation is around how the correction will be reflected in all future correspondence with the policyholder.Racheal Griffin

If a customer asks for money to be withdrawn from across all policies, where this is in excess of their 5 per cent tax deferred allowance, the customer could be faced with a significantly greater tax liability than would have otherwise been the case. 

Mistakes can happen and may lead to extreme tax consequences which are completely disproportionate to the growth received on the investment and this is what prompted a review of life insurance policy taxation by HM Revenue & Customs.

According to documents published alongside the Autumn Statement, rules will be added to the Finance Bill 2017 that will allow applications to be made to HM Revenue & Customs (HMRC) to have the charge recalculated “on a just and reasonable basis.” 

According to HMRC, this will lead to fairer outcomes for policyholders and the changes will take effect from 6 April 2017.

The government will also amend the list of assets that life insurance policyholders can invest in without triggering tax anti-avoidance rules.

Rachael Griffin, personal financial planning expert of Old Mutual Wealth, said the number of customers taking withdrawals from bonds in the wrong way was minimal so the change felt like a pragmatic approach that will allow for corrections to be made without impacting the general withdrawal rules on bonds for all other customers. 

She said: “My only reservation is around how the correction will be reflected in all future correspondence with the policyholder, and could lead to confusion.”

emma.hughes@ft.com