Tax on Chargeable Event Gains
A frequent source of confusion for taxpayers is that despite the name, Chargeable Event Gains (CEGs) arising on life assurance policies are subject to income tax rather than capital gains tax.
So, what else do you need to know?
When do CEGs Arise?
The most common situations in which CEGs arise are when life assurance bonds mature, are surrendered (in full or in part) or the life assured dies.
Up to 5% of the initial premium can be withdrawn each year without triggering a CEG. This allowance accumulates if unused. Despite not triggering a tax charge the 5% annual withdrawal is effectively tax deferred rather than tax free because amounts paid out are taken into account when calculating future CEGs.
Policyholders should be notified of a CEG by the insurance company who will issue a chargeable event gain certificate.
How is the Tax Liability Calculated?
The CEG is added to the taxpayer’s taxable income and taxed at 20/40/45% depending on the size of the gain and the amount of other income.
UK policies come with a non-repayable 20% tax credit which will reduce the amount of tax payable, however offshore policies do not.
There are a number of reliefs and planning opportunities available, including:
Top slicing relief – in simple terms this relief compares the tax payable in the year of the CEG with the amount that would have been paid if the gain was spread over the years the policy was in force.
Time apportionment relief – where the taxpayer was non-UK resident for part of the policy period, the taxable amount is time apportioned based on the periods of residence and non-residence.
Deficiency relief – if a gain arises on a partial surrender but a loss arises on the eventual full chargeable event, then relief may be available in some limited circumstances.
Non-UK residents – are not subject to tax on CEGs that arise in a year they are non-UK resident, however if they later become UK resident then a tax charge may arise under rules which target temporary non-UK residence.
Assigning bonds – provided that bonds are not assigned for consideration in money or money’s worth, assigning a bond should not trigger a CEG. This can give rise to planning opportunities for trusts, families and couples getting divorced.
Who Pays Tax on the CEG?
Where the policy is owned by an individual (the policyholder), they will be responsible for paying the income tax.
If the CEG arises on the death of the policyholder then the tax will normally be paid by the personal representatives and is treated as a liability of the estate.
For policies written into trust, the tax could be payable by the settlor (during their lifetime or tax year of their death), the beneficiaries (where bonds are assigned to them prior to surrender) or the trustees (in all other cases).
I’ve Received a CEG Certificate, What Should I Do?
Tax payable on the CEG will need to be reported to HMRC on a self-assessment tax return for the relevant tax year.
If you need help calculating your tax liability or submitting a tax return to HMRC, please contact Elliott Tax by clicking the button below.