Income Tax & Qualifying Policies

24 Apr

Changes announced in the budget on the 21st March affect the information contained below. Before taking any action based on this article please take specialist independent financial advice.

 This article looks at the main Qualifying Policy rules and conditions that must be met in order to retain the tax advantages associated with qualifying policies.
What is a ‘Qualifying Policy’?

A Qualifying Policy is a life insurance policy whose terms meet a complex set of conditions. These include rules about the policy term, regularity and level of premiums paid and the minimum sum assured. Also a policy cannot be qualifying unless it is certified as such by HMRC. Where a policy does not meet these conditions it is typically referred to as a ‘non-qualifying policy’.

It is tax-favoured, since it does not normally give rise to chargeable event gains. In addition, where the policy was taken out on or before 13 March 1984 and not varied since then, life assurance premium relief continues to be due on the premiums paid.

 Chancellor of the Exchequer George Osborne holds up his red Ministerial Box at 11 Downing Street

What are the basic Qualifying Policy conditions?

  • Term of at least 10 years
  • Annual premium must be:
    ≤ 1/8 x total premiums payable
    ≤ 2 x premium payable in any other 12-month period
    Payable annually or more frequently
  • Minimum sum assured test
    – The sum assured must be no less than 75% of the premiums payable throughout the term.
    – Where the life assured is age 55 or over the minimum sum assured is reduced by 2% for each complete year the life assured is aged over 55. For joint life policies, this age test applies to the elder life on joint life first death cases and the youngest life on last death cases.
    – Where the policy is a whole of life cover, the minimum sum assured only needs to be calculated to age 75 of the life assured.


Which Policies are Typically Qualifying?

  • Endowment, Capital Accumulation Plans & Maximum Investment Plans (MIPs)
  • Whole of Life, Life Assurance


What Creates a Chargeable Event on a Qualifying Policy?

If within 10 years, or three-quarters of the term if less, there is:

  • An assignment (in full or in part) for consideration
  • Surrender of the policy (in full or in part)

If within 10 years, or three-quarters of the term if less, the policy has been converted to paid up and there is subsequently at any time:

  • Assignment (in full or in part) for consideration
  • Surrender (full or part)
  • Death of life assured
  • Maturity


What Changes can be made to a Qualifying Policy?

Any change must be made on a plan anniversary and must be in accordance with the Terms and Conditions to retain the qualifying status of the policy.

If a change was made that was outside the Terms and Conditions it would almost certainly render the policy non-qualifying.


What Affect will it have on the Plan if Premium Payments Cease?

If premium payments cease there may be the ability to reinstate the plan. Reinstatement can only occur if done within 13 months of the first (or earliest) unpaid premium and if the Life Company has exercised its option to make the policy paid up due to non-payment of premiums.

If a policyholder advises that they no longer wish to pay premiums and wish to convert the plan to paid up they will not be able to reinstate the plan in the future.

Where annual premiums are paid, 13 months from the first unpaid premium will be one month after the next annual premium becomes due.

If a client elects to take the extension option on a MIP at year nine and then stops paying premiums before their tenth anniversary the policy will be non-qualifying. Because the exercise of the extension option creates a revised 19-year term, therefore the lower of 10 years and three-quarters of the term is 10 years. If they had not extended at that time the term would have remained as 10 years with three-quarters of the term being seven and a half years. As they had paid the premiums beyond then the policy would have been qualifying.

 This article is based on current legislation and interpretation. Tax relief and the tax treatment of investment funds may change in the future.
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