Please let me know if I am correct or not, in my understanding of this scenario.
If a person encashes a policy during their lifetime with a chargeable gain on it, it must be included in the self assessment tax return, with top slicing coming in to play, which could result in tax due at up to 45%.
If such a policy (with death benefit) is encashed after the person dies, is it eneterd on the SA return, or the IHT return or both. If on the IHT return, then IHT is payable at 40%. If so, would HMRC not be at a loss?
Thanks
Replies (3)
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If the policy is not written in trust for a beneficiary the policy comes to an end on the death and the chargeable gain is included in the deceased final tax return. The Income Tax needs calculating to determine the net worth of the estate. The net is then part of the estate. This can push the deceased IT into higher rates. This is a trap the IFA's do not adequately explain to the investor.
As HMRC get 40% of the net after the income tax I do not think HMRC looses.
So the net IHT account needs to be reduced by £ 30k if i am understanding you correctly?
Slightly ambiguous way of describing it. CJaneH's explanation was much clearer. The proceeds are included in the IHT chargeable estate on death; the chargeable event gain (CEG) is taxable via the tax return to date of death; the tax due in relation to that tax return (which would include the tax on the CEG) affects the value of the death estate (per s5(3) IHTA).
You might think of it (possibly slightly inaccurately) as: the CEG is liable to income tax and the net (of income tax) proceeds are liable to IHT. Whatever, HMRC wins, not loses.