I have been asked to look at the tax consequences relating to the encashment of an overseas insurance policy which gives rise to a large Chargeable Event with no notional tax to take into account.
The person who took out the policy was UK resident and it was her sole life that was insured. My understanding is that, on death, there will be a chargeable event arising at the time she died and taxable on her in a personal capacity and would be based on the value of the policy at the time of death, which was in the year to 5 April 2020. The executors dealing with her estate encashed the policy in the following tax year about a year after she died and have received a chargeable event certificate in their names.
Am I correct that the disposal proceeds should be treated as the value at date of death with and taxed on her, with the possibility now of late notification? She was a non-taxpayer with a chunk of her personal allowance available. Or am I barking up the wrong tree and the chargeable event is taxable on the executors as arising during the period of administration? Any pointers gratefully received.
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The only odd thing about the facts you describe - that it took the executors a year to claim under the policy. If the client paid the premium and did not put the policy in trust, then there is a chargeable event on her death, based on the surrender value immediately before death. The gain is taxable on the client (at least that is how HMRC read the law: there is another possible argument which puts taxability on to the executors).
Unless she was within self-assessment then the executors have failed to notify her chargeability within the time limit, and so have opened up the issue of FTN penalties.
Thanks Richard, these were my thoughts exactly. I am going to have to explain to the executors that they may have interest and penalties. She was not in self assessment as only other income was state pension.
I would be interested in the other possible argument that may put the liability on the executors. Are you able to point me in the right direction on this?
Section 461(1) ITTOIA says the gain arises "when a chargeable event occurs".
Section 484(2) shows that the event occurs on the death which gives rise to benefits.
The person liable to the gain is the owner "immediately before death" (s 464(1)) and the gain is based on the surrender value immediately before death (s 493(7)). But neither provision affects when the gain arises which is on death. It could be argued then that as the policyholder ceases to exist on death the gain on it cannot be income arising before the death, and thus as the gain arises on or after death it is the personal representatives who are liable for the tax on the gain as income of the estate.
I have just dealt with this exact situation in the case of my mother for whom I am the sole executor. I decided against making returns on this basis because there was no higher rate liability on my mother but there might be on the beneficiaries receiving income taxed under Ch 6 Pt 5 and also because I wanted to get the estate sorted as quick as possible.
This policy was a UK one so basic rate tax did not affect the issue. With an overseas policy there will be basic rate tax to pay if the gain is the deceased's and if it is the executor's gain (technically the "default basic rate"), but the executors do not get a personal allowance nor do they qualify for the savings nil rate. In balancing the benefit of this argument in your case you will need to factor that in, as well as the likelihood of any beneficiary being liable at higher rates.
As has been pointed out, top-slicing relief may be available to the deceased. It cannot apply to the personal reps or to the income in the hands of the beneficiaries.
Richard, I am very grateful for your detailed response and I now see where the other argument may lie. There are personal allowances and savings allowance available to the deceased and I believe the way I need to go is to calculate the liability relating to the deceased and factor in possible interest and penalties for late notification against the availability of these other allowances. My belief is that this will still be the most beneficial and I will write to HMRC with a proposal to get it settled. At least it will be an unprompted disclosure so should keep the penalty level down. I will have to see whether HMRC take the counter argument. Once again, many thanks.
Of course the personal reps will also have notified late and be in line for penalties and interest.
It looks like there may be some top slicing relief. Information here on how to claim it:
https://assets.publishing.service.gov.uk/government/uploads/system/uploa...
Thanks Jane, there will be top slicing relief and all will be chargeable at basic rate but still a considerable amount involved!
If the only other income was her OAP then is not some of the gain covered by personal allowance and the savings nil rate?
