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Traded Endowments
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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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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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