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Traded Endowments Taxation

An insurance company does not make deductions for personal tax before paying out the proceeds from a TEP, but tax is deducted from the company’s underlying investments before the bonus rates are declared.

By carefully structuring your investment there are many ways to help reduce or even eliminate personal tax liability.

For UK residents - TEP proceeds (whether at maturity, death of the life assured or resale of the policy) are normally liable only to Capital Gains Tax (CGT). Depending on your individual tax position, if a ‘non-qualifying’ TEP is chosen to meet your requirements, as a higher rate tax payer you may be liable to income tax on the proceeds instead of CGT.

NB - ‘non-qualifying’ means the policy has not been certified by the Inland Revenue to benefit from specific income tax exemption.

For overseas residents - tax treatment depends on the laws of the country of residence at the time the policy proceeds are paid. With careful planning, tax can often be avoided.

The minimum term for which an endowment policy can be arranged to avoid the possibility that there could be some tax liability on the proceeds is 10 years, which is why the minimum term for an endowment policy is normally 10 years. However, if you have changed the terms of your policy, perhaps by increasing the premiums, within the last 10 years there may also be some tax liability on the proceeds.



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Mortgage holders cheered as margins improve in traded endowment market

2010/06/24 - Endowments - 0 Comments - 257 words


Traded Endowment Policies : There exists a way to sell second hand with-profits life assurance policies in which traded endowment brokers find best deals from purchasing market makers.

The point is that the redemption value of old endowment policies mid-term is usually below expectation whilst there are investors who wish to buy old policies which can be transferred between holders and kept running under new ownership until maturity.

Life policy holders have an option to trade policies in before the end of the contract and the policy holders can get improved offers for the policy they hold via competitive bids from the TEP brokers - traded endowment brokers.

This facility of use to home buyers and sellers who need to change their mortgage as they sell and rebuy new homes.

The market has recently been supressed with margins squeezed by the low interest environment of the last 18 months. Brokers have been unable to offer enough margin to warrant trades taking place.

However, TEP's or traded endowment policy surrender values appear to be back on the increase after experiencing a couple of years of stagnation, according to leading TEP brokers.

Now is the time again to try to get increased value your old endowment. The worst you can do with an old policy is usual to simply surrender it back to the original life company to obtain redemption value. But thats what the TEP brokers can do for you - to evaluate your policy and make an improved offer.

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Dont surrender old with-profits savings plans, trade endowments on the TEP market

2010/06/04 - Endowments - 0 Comments - 293 words


Traded Endowment Policies

Due to high charges by life assurance companies for early surrender endowment policies there exists a market for second hand with-profits policies in which traded endowment brokers find best deals from purchasing market makers.

Those that hold and wish to sell endowment policies have the option to trade policies in before the end of the contract. Policy holders are able to get improved offers for the policy they hold via competitive bids from the TEP brokers - traded endowment brokers.

Via a broker, TEP market makers, (traded endowment market makers) will assess the value of your endowment - the endowment surrender value. Then, if you decide to cash in endowment policy, the market maker takes on the monthly payments until the policy matures or they resell to another individual on the open market.

People who are changing their mortgage, going through divorce, need more capital or who predict a fall in the profit of their endowment may have a requirement to sell a with-profits endowment or life assurance policy.

Traded Endowment Policies or TEPs are second hand with-profits endowment policies legally assigned to new owners who pay the purchase price and take over the payment of future premiums. The life assurance cover remains on the original life/lives assured, but all policy benefits on maturity or, an earlier life assurance payout, are the property of the new owner.

As TEPs are purchased mid-term the policy already has a guaranteed value made up of the 'Basic Sum Assured' and 'Bonuses Attaching' and the initial charges have all been paid by the original policyholder.

For more information on cashing in endowment policies check ukcitymedia pages. There is a link to the traded endowments section in the left nav bar, at the bottom of the home page.



Life insurance giant Prudential pulls plans to buy AIG Asian : AIA

2010/06/02 - Company Reports, Endowments - 0 Comments - 189 words


Prudential, who scrapped plans to buy AIG's Asian arm AIA last week, are under pressure from institutional shareholders to make changes on the board. The papers are hinting today that chairman Harvey McGrath and chief executive Tidjane Thiam could end up moving on after the proposal fell apart.

Chairman Harvey McGrath indicated that the board withdraw its interest after failing to negotiate a reduction to the $35.5bn price tag for AIA. Correspondingly, the Pru's plans for a $21bn right issue will now also be scrapped.

AIG rejected the Pru's revised proposal last wednesday in which the offer price was cut from $35.5bn to $30.75bn. AIG chief executive Robert Benmosche agreed in principle to the revised terms, however the rest of the board voted 10-2 against. AIG will now revive its earlier intention for a partial listing of AIA on Hong Kong stock exchange.

Prudential could now faces penalties as well as costs associated with the deal. Break fees of £153m will will be applicable whilst the Pru can also expect to pick up the considerable tab for underwriting, advisory and other fees likely to be close to £300m.



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Taxation of TEPs

For UK taxpayers the tax treatment of TEPs will depend on whether the policy is 'qualifying' or 'non-qualifying'. In many cases no tax will need to be paid on the profits on maturity or earlier disposal. For overseas investors the proceeds of maturing policies are generally tax-free. This depends, however, on the country in which the investor resides.

For UK individuals (for trusts, pension schemes and corporate investors different tax considerations apply) the tax treatment is as follows:

Qualifying Policies - these are normally unaltered policies or those altered to mature 10 years from the date of alteration. Qualifying TEPs are subject to Capital Gains Tax rules.

Tax Treatment of 'Qualifying' TEPs:

  • Capital Gains Tax (CGT) is payable on any Capital Gain i.e. the maturity value less the purchase price and all premiums paid from the purchase date.
  • The resulting capital gain can be further reduced by taper relief (for TEPs purchased after 5th April 1998).
  • If after utilising CGT allowances (either single, or joint - if the TEP is bought in joint names) there is still a capital gain, it will be taxed at either 20% or 40% depending whether you pay basic or higher rates of tax.
  • Non-qualifying Policies - are usually policies altered to mature within 10 years of the policy alteration. Non-qualifying TEPs are taxed under income tax rules and are subject to 'top-slicing' relief. Quite often non-qualifying policies can be tax-free in the hands of basic rate taxpayers.
Tax Treatment of 'Non-Qualifying' TEPs:
  • The 'chargeable gain' is calculated by deducting the total premiums paid into the policy from inception (i.e. those paid by the original owner as well as the new owner) from the maturity value. This must take into account premium alterations.
  • Higher rate taxpayers are then charged tax on the amount of Chargeable Gain at the difference between higher and basic rates of tax.
  • For basic rate taxpayers the chargeable gain is divided by the number of whole years the policy has run. This figure is referred to as the 'top-slice'. The top-slice is added to all other taxable income received in the same tax year and if the resultant total income (including the slice) is below the higher rate tax threshold then no tax is payable on the total chargeable gain. If the top-slice results in the total taxable income exceeding the higher rate tax threshold, the proportion of the slice falling over the threshold is then applied to the total chargeable gain and this amount is subject to income tax at the difference between basic and higher rates.


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