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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.
To contact me, use the details above. Email, twitter welshmoneywiz, linkedin Darren Nathan

Income Drawdown & Capped Pension Income

23 Apr

Those who are already in Pension Drawdown and those considering Pension Drawdown, should consider carefully the impact of the changes to the pension system announced by the Coalition Government and are now law.

The Good News –

  • capped income will be available throughout a client’s lifetime
  • the new tables provide age related factors up to age 85 which will benefit those clients, previously in Alternatively Secured Pensions, where income was based on an age 75 income factor regardless of age.

The Bad News –

  • if you were in drawdown before 6th April 2011, then at your next 5 year review the new rules will apply & maximum income will reduce to 100% of GAD (from previously 120%) and reviews will be every 3 years
  • those over 75 will have annual income reviews

Some see the biggest difference between the old and new regime has focused on the fact that the base income does not enjoy the 20% uplift included in the old calculations. Personally, I have guided clients to take a sustainable amount is income, which meant that we could benefit from increased income at the review dates rather than the maximum income today. You must always appreciate that this is an investment, so if the investment returns 6% and you draw 7% then your future income will diminish. Whereas, if you draw 5% and the investment returns are 7%, then at the review, because the portfolio has grown the future income can be increased (within GAD limits).

However, where clients are in an existing five-year reference period and use additional designation to top-up existing post A-Day capped income, the new maximum income applying for the remainder of the existing reference period will enjoy a 20% uplift using the new income factors.

I have written this document based on details available and current understanding. Please consider that Tax Relief and tax treatment of investment funds may change in the future.
My email is, twitter welshmoneywiz, linkedin Darren Nathan

Changes to State Pension and Pension Credits

5 Apr

Budgets are sometimes contrived and Chancellor George Osborne’s was no different. It is estimated that almost two million pensioners will not benefit overall from the changes. Yes, they will receive more through State Pension but will receive less through Pension Credits.

Pension Credits will reduce  for pensioners who saved for their retirement, which takes affect this week. These changes are also expected to effect discounts, such as, on council tax, housing benefit, cold weather payments, and help with heating costs from energy suppliers.

I think the changes will be a shock for many pensioners who will be receiving this news in letters from the Department for Work and Pensions revealing their state pension for the new tax year.

Personally, I believe that it is unfair for older people on low incomes to have their benefits reduced. Typically and sadly I think it is plausible that this may be the case, where the headline is rather rosy – highest rise in State Pension – and the details may not be quite so generous. The changes to Pension Credit were known as they were announced in the pre-Budget report in 2011.

The situation will lead to those pensioners who have larger savings will receive less while those who are poorer will receive more. To be fair with the government’s limited resources I think they have tried to make the best out of a poor situation. I would prefer all pensioners to benefit but where would we need to make cuts to pay for this ? – Education, Health Service, Social Services, Police Force, etc. – I just feel they were limited on choices.

Pension Credit has two components:

  • Guarantee Credit, which tops-up your income
  • Savings Credit, which rewards people who  saved for retirement.

Guarantee Credit is claimed by the poorest pensioners. The government calculates how much income you receive from state pension, private pension and savings of more than £10,000. Currently, Guarantee Credit it tops up your pension, to income of at least £137.35 a week (for a single person) and £209.70 a week (for a couple).

Pensioners with an income of at least £103.15 a week (£164.55 for couples) can receive Savings Credit. This pays up to £20.52 a week for a single pensioner and £27.09 for a couple. This is on top of the basic state pension of £102.15 and any Guarantee Credit.

Increases to Guarantee Credit historically has been linked to average annual increases in earnings. In November 2011, the Chancellor announced a higher increase of 3.9%. Guarantee Credit from next week will increase to at least £142.70 a week (£217.90 for couples).

For those affected, time is upon us to make some decisions – those who have accepted lower returns on capital may need to review their decisions to up their income to support cost of the changes. I look after many retired people who are enjoying the benefit of income portfolios typically yielding around 4.4% net of basic rate tax. As a portfolio, capital values will move up and down but risk profiling helps limit the risk to capital.

Who Can Claim Pension Credit

The qualifying age for pension credit is 61 for Guarantee Credit and 65 for Savings Credit.

The Guarantee Credit age is rising with the women’s state pension age. This will hit 65 in 2018, 66 in 2020 and 67 in 2027.

The new rules set out that from April, pensioners must have an income of £111.80 a week (£178.35 for couples) to qualify for Savings Credit.

The Treasury has also reduced the maximum payout from April to £18.54 (£23.73 for a couple).

If I can help or you have any questions, please ask. My details are in the header or Email me at

Property-Based Inheritance Tax Avoidance Schemes Are Now Blocked

21 Mar
Inheritance Tax (IHT) rules around excluded property is being amended.
This is to prevent UK domiciled individuals using the rules around excluded property under an offshore trusts to avoid Inheritance Tax while retaining a benefit in the property.
The legislation will amend current IHT excluded property and settled property provisions. The changes are designed to primarily replicate the tax treatment that a UK domiciled individual would suffer if the trust was a UK trust rather than an offshore trust. So, the outcome ensures any potential reduction in the value of a person’s estate as a result of these schemes remains liable to inheritance tax.

These provisions will apply to any new schemes entered on or after 21 March 2012.

The secret to effective IHT planning is to keep the planning conceptually simple, non-contentious and fall within the terms and spirit of the legislation. Where schemes circumvent the rules, it is fair to expect that these schemes are expected to be caught by these changes in legislation. Since the early 1990’s HMRC, Treasury and the Government have been very clear on their outlook. Sometimes, the cost of these schemes and the associated legal battles more than outweigh the tax savings potential.

Always plan carefully

Any questions – my email is


The Ying & Yang of Income Tax Allowances

21 Mar

Hundreds of thousands of basic rate taxpayers will fall into the 40% income tax bracket when the government lowers the threshold next year.

The Budget small print shows the higher rate threshold will be reduced by £1,025, from £42,475 to £41,450, from April next year, capturing, experts suggest, as many as 300,000 extra people.

 The Good News

  • the top rate of tax will be cut to 45% from April 2013
  • the personal allowance will increase to £9,205

The Bad News

  • basic rate threshold will reduce to £32,245


Personal Allowance Increase

21 Mar

From April 2013, the basic personal allowance will increase to £9,205. This is a massive increase of £1,100.

The Chancellor stopped short of announcing any planned increases for 2014, where there are claims that the personal basic allowance may raise to £10,000. This is targeted to be achieved by 2015, as announced in 2011.

VCTs & EISs – Clampdown If Just Targeting Tax Relief

21 Mar

George Osborne confirmed the government will roll out a new disqualifying purpose test to exclude companies set up for the sole purpose of accessing tax relief.

 The purpose of VCTs and EIS’ is to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies, as opposed to taking advantage of the generous tax breaks on offer.

The consultation will come as a blow to some feed-in-tariff VCT and EIS providers. The Government will also introduce a new disqualifying purpose test to exclude companies set up for the purpose of accessing relief, exclude acquisition of shares by a qualifying company in another company, and exclude investment in some Feed-in Tariff businesses.

The good news :-


  • from April 2012 the investment universe for VCTs (Venture Capital Trusts) will be widened. 
  • £1.0 Million investment limit per company rule has been lifted
  • VCTs will have the option to invest larger (actually unrestricted amounts) into a small business


  • EIS tax relief allowance to be doubled to £200,000.


Budget 2012 :- Income Tax Relief Capped

21 Mar

For those who contribute to pensions, the government is introducing a cap on income tax relief for anyone claiming more than £50,000 a year.

For those seeking to claim more than £50,000 of tax reliefs, a cap will be introduced at 25% of income. The plan is to prevent the business activity of setting-up loss making businesses purely to claim tax relief i.e. offset trading losses against trading profits. George Osborne confirmed that the limit will include, amongst others :-

  • Loss reliefs against total income
  • Qualifying loan interest
  • Gift Aid and Charitable gifts of land and shares

The government said it would seek to ensure the cap did not impact on charities that rely on large donations and there would be measures to protect philanthropic giving.

The good news is the chancellor has not cut pensions tax relief.

My Expectations from The Budget

21 Mar

This afternoon, the Chancellor George Osborne will deliver his third Budget and I am not expecting many surprises.

Based on the leaks, per-announcements and general rhetoric, I’m expecting the following announcements:

  • Houses worth more than £2m will face a new 7% Stamp Duty Band. This is expected to generate a further £1.5 Billion in additional revenue, which is expected to go to funding a rise in the tax free income tax personal allowance.
  • The top rate of income tax will be reduced to 45% from April 2013.
  • The income tax personal allowance will increase to £9,205 in April 2013 before a further rise by April 2014 (possibly to £10,000). This would be a year earlier than previously suggested.
  • From 2014, income tax payers will be sent a detailed breakdown of the tax they pay and how the Government plans to spend the revenue.
  • The closure of loopholes allowing stamp duty to be avoided. (This was achieved by purchasing the house through an offshore company or by exploiting rules put in place to stop developers paying stamp duty twice.)
  • Changes to pension tax relief is expected. (It is expected either as a reduction in the annual allowance to below the current level of £50,000; or a reduction in the rate of tax relief higher rate tax payers can claim.)
  • It is expected that the Office for Budget Responsibility will announce an increase its forecast for growth in 2012 to 0.8%.

Seeking Advice

18 Mar

I have been asked by many, the best way to contact me if you are seeking advice?

The easiest is by the blog email :-, or my business email :- or

Or call my office :- 029 2020 1241

Or my mobile :- 07931 388651

Or to follow me  –

On twitter :- Welshmoneywiz

On Linkedin :- Darren Nathan

All the best