By Kira Nickerson The ABI has started talks with the Inland Revenue to discuss the basis on which ta...
By Kira Nickerson
The ABI has started talks with the Inland Revenue to discuss the basis on which tax is calculated on a jointly owned life policy switching to single ownership in the event of a divorce.
The Revenue views the switch on divorce as a partial encashment, whereas UK life offices view it as a full surrender. Different tax calculations are used on partial surrenders and depending on the policy's worth, the tax incurred could be substantially more than if it was calculated as a full surrender, said Anne Young, senior technical manager at Scottish Widows.
Tax is usually only incurred on a bond when it is cashed in. However, when the ownership of a bond or life policy moves from joint to single ownership, a potential tax liability is created for the person who is giving up their share of the bond.
In cases of divorce, assets are often divided between the former partners and life policies tend to be assigned to one of the partners while the other receives an asset of equal value.
The Revenue believes this change in ownership triggers a tax as the individual is effectively selling their portion.
Had the ownership change occurred while the two were still married then they would be exempt from this tax. For people who are not married but have a jointly owned policy, a change in ownership would automatically incur a charge.
Young said: "It may be tricky to do, but IFAs could ask their clients if they are intending to get a divorce so that the ownership change could take place while the couple are still married. Another way around this would be not to sell joint-owned policies."
The disadvantage of this is that a joint policy will produce better returns than two single policies due to the higher sum invested, she said.
While the ABI concedes that assignment of ownership on divorce does incur a charge, it is lobbying to have the calculation basis of that charge changed to a profit/loss calculation.
The Revenue has been applying the 5% rule, which allows an investor to withdraw 5%pa without incurring a tax charge. An investment of £10,000 into a single premium bond, held, for example, for three years, with a value of £15,000 when the couple divorce, would have £7,500 which is effectively being assigned to the other spouse. Of this £1,500, equalling three allotments of 5%, can be deducted tax-free. This leaves a chargeable amount of £6,000 at which the higher rate taxpayer will be taxed at 18%. Basic rate taxpayers would not be affected.
The profit/loss calculation would see a profit, after the original investment is subtracted, of £2,500 per spouse. On changing ownership, it would be this amount that is taxable, again for higher rate taxpayers at a rate of 18%.
The ABI believes it is more appropriate for the chargeable event to be calculated on a profit/loss basis as the change in ownership is similar to a full surrender of the policy.
continued on page 3
What made financial headlines over the weekend?
Pensions neglect to be criminal offence
All-day event on 24 April
Consequences could be more severe than in stress tests
AFH has six segregated mandate funds