Tax on insurance policy

If the tax payer has an insurance saving plan with an insurance company, the tax payer needs to put certain amounts of money to the insurance company each year and accumulated upto certain amount for 6 years. The tax payer can get about 3% return each year from this insurance plan. If the tax payer died, the beneficiary can get 105% on the principal amount and also the prorata interest. The tax payer is freely to surrender the plan any time after the initial lock period of 6 years. Please kindly advise whether the tax payer needs to pay any UK tax on this 3% return each year? If yes, should this be treated as interest tax or dividend tax? The insurance plan was purhased before the tax payer become the UK tax resident, the principal amounts should be treated as her clear capital as this amount should not be subjected to any UK tax, right?

Hi winglam,

Please refer to guidance at:- HS321 Gains on foreign life insurance policies (2023)

Thank you.
 

Hi Admin 20, May I know which section of HS321 has addressed my question? I could not find the relevant section. Thanks

Hi winglam,

"You may also have made a gain which is only taxable when your policy ends. This is because in each insurance year you can withdraw up to 5% of the premium paid into your policy without a gain happening in that year. An insurance year begins on the anniversary of the date of your policy was taken out and ends on the day before the anniversary in the next year (except in the final insurance year). The 5% takes into account regular pay outs or withdrawals.
If, for example, you do not make any withdrawals in an insurance year, the full amount of the 5% ‘annual allowance’ is carried forward. This means that in the second insurance year, if you have not made a withdrawal in the first insurance year, you can withdraw up to 10% of the premium paid without a gain happening in that second insurance year.
The 5% annual limit is not a tax-free amount. All amounts paid from or withdrawn from a policy have to be added into the calculation made when your policy ends."

Thank you.

Hi Admin 20, I really don't know whether you are fully understand my questions or not. I don't think the withdrawls up to 5% is applicable to this case. In my case example, let assume that the premium paid is GBP100,000, the tax payer has already paid up the premium before the tax payer become the UK tax resident. The tax payer receive GBP3,000 each year from this insurance policy (which is like a saving plan). I believe this GBP3,000 should be treated as interest income. The tax payer has not withdrawn any premium paid, the premium paid in this case is still GBP100,000. The tax payer receives only the GBP3,000 as a annual return for this premium paid GBP100,000. If the tax payer surrender the policy at the beginning of a anniversary date, the tax payer can still receive GBP100,000 premium paid, there is no gain/loss. The tax payer only earn GBP3,000 as an a return for the premium paid GBP100,000. So I don't think the HS321 is applicable to this case. If HS321 is applicable to this case, does it mean that the tax payer has no gain for the annual return GBP3,000 (need not to pay tax on this amount). The tax payer will need to pay the tax on the final year when surrender the policy. For this policy, the tax payer can receive GBP3,000 up to 100 years old, are you saying that the tax payer only need to pay tax at 100 year old if he won't surrender the policy before 100 years old? Then the gain would be GBP3,000 x 45 (assuming that the tax payer is 55 years old when become UK tax resident) at 100 years old. It sounds strange that the tax payer doesn't need to pay when receives the annual return on a yearly basis but to tax it on the final year.

Hi,

This sounds more like a purchase life annuity and you would declare the annual amount received as income. You can see guidance and associated links here:

IPTM4400 - Purchased life annuities: annuities paid by overseas payers: introduction

Thank you

Q1: If I have a foreign life policy I paid 5 years then start collecting 5% (USD 5000) cash value on 6th year of principal (USD 100000) from the policy , Is the income tax of this USD 5000 can be deferred until I surrender the policy? Q2: As my policy is whole life one , Do you mean I can pay the tax after I passed away or still need to pay at year 20 as 100% principal has been taken out?

Hi S_bflai,
Please have a look at the helpsheet HS321 (HS321 Gains on foreign life insurance policies (2024)) as there are different rules depending on the policy type.
Thank you.

How to calculate the chargable gain on a life insurance policy? If the tax payer pay a premium, says £1,000 each year for 27 years and this insurace policy cover a death coverage, say £30,000 (the beneficiary can get £30,000 if the insured passed away), the owner surrender the insurance policy at the beginning of year 28, the owner only received £26,000 when surrender this policy, does it mean that there is a chargable loss for this insurance of £1,000 (£26,000 (amount received) minus £27,000 (total premium paid)? Can the tax payer claim for the chargable loss against his other income such as saving income? If no, does the taxpayer requires to report this chargable event in the self assessment if it incurs a loss? Thank you.

Hi,

You can see guidance below which includes the section on how to work out a gain:

HS320 Gains on UK life insurance policies (2024)

Thank you. 

I have read HS320, it has defined the following terms. On maturity or full surrender A gain on maturity or full surrender should be shown on the certificate provided by your insurer, together with the amount of Income Tax treated as paid. If not, it’s calculated as Total Benefits (TB) minus (Total Deductions (TD) plus Previous Gains (PG)). If the above definition applied, in my example above, total premium paid is GBP27,000 and the total benefits is GBP26,000 (even if the total benefits has included GBP1,500 as dividend/interest), there is a chargable loss for this policy, there is no need to make entries in the Self Assessment and there is no need to disclose this event in any additional information, right?

Hi,
The result of the calculation when a chargeable event arises may not be a positive amount. If so, you have not made a gain and should not therefore make any entries on your tax return.
If the result of a full surrender, death or maturity calculation is negative and you made no gains on the policy in earlier years, you have made a loss on the policy. There is no relief for that loss and you should not make any entries on your tax return. A loss on one policy cannot be set against a gain on another policy.
Thank you.