chargeable event certificate and inheritance tax

chargeable event certificate and inheritance tax

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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

 

 

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By CJaneH
05th Jan 2021 15:31

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.

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Replying to CJaneH:
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By northernman
05th Jan 2021 16:00

Thanks CJaneH

The policy was not written in trust.

When the IT is calculated, part of the gain is taxed at 45%.

So in round figures, in this case the proceeds was £ 300k, gain is approx £ 100k, with approx 10 k of the gain taxed at 45%, and then an allowance for top slicing coming off the total tax due leaving about 30K due on the IT return.

So the net IHT account needs to be reduced by £ 30k if i am understanding you correctly?

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Replying to northernman:
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By Tax Dragon
05th Jan 2021 19:03

northernman wrote:

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.

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