COMPLIANCE OFFICERS FORUM

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COMPLIANCE OFFICERS FORUM

• November 2008

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COMPLIANCE OFFICERS FORUM

• sponsored by

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WENDY BECKETT

• Chairman for the Forum/ Shepherds Friendly
  Society

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Todays presentations
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NICK MORRELL

• Oxford Actuaries and Consultants

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AFS Compliance Officers Forum
Is Compliance sufficiently taxing?
Nick Morrell Consultant Actuary 6 November 2008
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Objective

• Provide some background and structure
• Point out some of the pitfalls
• BUT NOT
• To tell you everything you need to know about tax

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Example A

• What about Tax
• Under existing legislation, the allocation of
• profits, compound bonus and the Plan
• maturity value are all completely free of tax.
• Claims are also payable free of tax, provided
• it is being used to replace income lost
• through illness or an accident.

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Example B

• WHAT ABOUT TAX AND ASSOCIATED COSTS?
• HM Revenue and Customs rules regarding the
  taxation
• of benefit and calculation of trading profit and
  the
• eligibility rules and benefit level available
  from the State
• may be subject to change in the future.
• The Key Features document and the Societys
  Rulebook
• includes details of the current tax situation and
  other
• costs associated with the policy. Please note
  that the
• tax position may change and there could be other
  costs
• associated with the contract that are paid for by
  the
• Society or imposed by it.

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Example C

• The Plan allows you to contribute up to 25 a
  month, or 270 a year, on a TAX-EXEMPT basis
• Your savings will grow free of income and capital
  gains tax and your child's payout will be
  completely TAX-FREE

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Example D

• Tax
• If your policy meets current friendly society
  exemption levels ie term exceeds 10 years and the
  weekly premium does not exceed 5 per week, the
  proceeds of your policy will be completely free
  of all tax. If the term of your policy is less
  than 10 years or the premium exceeds 5 per week
  a chargeable event will occur if the proceeds
  on surrender or maturity exceed the premiums
  paid.

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Example E

• What about Tax?
• The fund is free of tax on both income and
  capital gains except for tax deducted from
  dividend income which cannot be reclaimed
• Provided premiums are maintained the benefit
  payable at maturity or on earlier death is free
  of tax. There may however be a liability to tax
  if the plan is cashed in during the first 10
  years or three quarters of the term if sooner
• The amount payable on death before the end of the
  savings period is added to the value of the life
  assureds estate and therefore may be liable to
  inheritance tax
• This information is based on our current
  understanding of HM Revenue Customs rules which
  may change in the future

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Two (potential) taxpayers

• Tax on the Society
• Tax on the Policyholder

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Tax-Exemption

• TAX ON THE SOCIETY
• Free of tax on interest income and property rents
• Free of tax on capital gains
• BUT
• No relief on dividends (paid from taxed profits)
• Overseas withholding tax
• Property limited partnerships
• Stamp duty, SDLT, VAT, NI, Business rates, etc
• No relief on expenses
• Tax-exempt not completely free of all taxes

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Sickness business

• Society usually tax-exempt - but not always
• Policyholder
• Surplus - usually free of tax - in the UK
• Sickness Benefit - usually free of UK tax
• PROVIDED
• Premiums are paid from taxed income

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Example A

• What about Tax
• Under existing legislation, the allocation of
• profits, compound bonus and the Plan
• maturity value are all completely free of tax.
• Claims are also payable free of tax, provided
• it is being used to replace income lost
• through illness or an accident.

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Example B

• WHAT ABOUT TAX AND ASSOCIATED COSTS?
• HM Revenue and Customs rules regarding the
  taxation
• of benefit and calculation of trading profit and
  the
• eligibility rules and benefit level available
  from the State
• may be subject to change in the future.
• The Key Features document and the Societys
  Rulebook
• includes details of the current tax situation and
  other
• costs associated with the policy. Please note
  that the
• tax position may change and there could be other
  costs
• associated with the contract that are paid for by
  the
• Society or imposed by it.

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Life Assurance

• Taxable and Tax-Exempt
• Qualifying and Non-Qualifying
• Chargeable Event Regime

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What makes a policy tax-exempt?
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What makes a policy tax-exempt?

• Policy size does not exceed the tax-exempt limit
  at the time of issue (currently 270 pa)
• Policyholder has not taken out multiple
  tax-exempt policies
• Society has not opted for the policy to be
  taxable
• Issued by a friendly society

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What makes a policy qualifying?

• Accords with the qualifying rules
• Separate rules for taxable and tax-exempt
• Certification (taxable only)
• Number of tests, including
• Term
• Premium
• Sum Assured
• Policy options, etc

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What is a Chargeable Gain?

• Event When policy proceeds payable and
• Policy is non-qualifying, or
• Qualifying policy surrendered / paid up early
• Gain Proceeds minus premiums
• Who A tax charge on the policyholder
• Tax Income tax not capital gains tax
• How Society issues chargeable event certificate

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Tax Rates
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Importance of Qualification

• 10 year savings plan, 25pm, maturity value 4000
• Gain is 1000
• Qualifying tax nil
• Non-qualifying tax 200 (basic rate)
• Or 400 (higher rate)
• 1000 policies total bill 220,000
• (assuming 10 higher rate)

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Common pitfalls

• Policy certification
• Sum assured test
• Normally 75 premiums payable
• Childrens restriction to 800
• Paid-up policies
• Must be automatic
• Suicide clauses
• Sub-standard lives

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What else?

• Old age relief
• Inheritance tax

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Example C

• The Plan allows you to contribute up to 25 a
  month, or 270 a year, on a TAX-EXEMPT basis
• Your savings will grow free of income and capital
  gains tax and your child's payout will be
  completely TAX-FREE

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Example D

• Tax
• If your policy meets current friendly society
  exemption levels ie term exceeds 10 years and the
  weekly premium does not exceed 5 per week, the
  proceeds of your policy will be completely free
  of all tax. If the term of your policy is less
  than 10 years or the premium exceeds 5 per week
  a chargeable event will occur if the proceeds
  on surrender or maturity exceed the premiums
  paid.

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Example E

• What about Tax?
• The fund is free of tax on both income and
  capital gains except for tax deducted from
  dividend income which cannot be reclaimed
• Provided premiums are maintained the benefit
  payable at maturity or on earlier death is free
  of tax. There may however be a liability to tax
  if the plan is cashed in during the first 10
  years or three quarters of the term if sooner
• The amount payable on death before the end of the
  savings period is added to the value of the life
  assureds estate and therefore may be liable to
  inheritance tax
• This information is based on our current
  understanding of HM Revenue Customs rules which
  may change in the future

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Example F

• What about tax?
• The fund
• Money invested in the Plan benefits from special
  tax concessions. This means that our fund does
  not pay tax on capital gains and income received
  from cash deposits, gilts and fixed interest
  securities. No reclaims of tax can be made on
  dividend payments received within the fund.
• The payout
• The money will be tax free, provided that the
  Plan has been going for at least three quarters
  of the term (or 10 years if this is a shorter
  period of time). For a 10 year Plan this means
  keeping it going for at least 7 years and 6
  months. If the Plan is cashed in early or you
  stop paying in before this, the beneficiary may
  have to pay income tax on the money they receive.
• Tax treatment depends on your personal
  circumstances. Any references to taxation are
  based on our understanding of current legislation
  and HM Revenue Customs practice, which is
  subject to change. If the Government changes the
  tax treatment of friendly society tax exempt
  savings Plans this may reduce the potential
  growth from the investment.

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But did you know?

• HMRC audits
• ESC
• Policy extensions
• With or without premiums

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Summary

• Life assurance tax is complicated
• but friendly society tax even more so
• Have you got it right?
• Does your literature fairly reflect the position?

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References

• Income Corporation Taxes Act 1988 Part XII
  Chapter 2 (tax-exemption) Schedule 15
  (qualifying policies)
• Income Tax (Trading and Other Income) Act 2005
• Part 4 Chapter 9 (chargeable events)
• Insurance Policyholders Tax Manual
• www.hmrc.gov.uk/manuals/iptm/index.htm

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See more at www.oacplc.com
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AFS Compliance Officers Forum
Is Compliance sufficiently taxing?
Nick Morrell Consultant Actuary 6 November 2008
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LIS HAYWARD and JOANNE SMITH

• The Consulting Consortium

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ANTHONY MILLER

• Inmarkets

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EDWARD de la BILLIERE

• Hill Dickinson

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QA
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Workshop
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WENDY BECKETT

• Chairman for the Forum/ Shepherds Friendly
  Society