Module 8 – When does a tax charge on a bond arise?
Chargeable eventsThis is module 8; we’ll look at when a tax charge on a bond arises.
A tax charge can only arise when a ‘chargeable event occasion’ occurs. The different types of transactions are listed below.
1 Death giving rise to payment of benefits - date of death
2 Maturity (mainly applicable to CRBs) - date of maturity
3 Total surrender of the policy - date of surrender
4 Assignment for value (for example the sale of the bond) - date of assignment
5 Partial withdrawal across all segments (if exceeds 5% allowance) - end of the policy year
6 Individual surrender of segments - date of surrender
For chargeable events arising after 6 April 2002, life offices are required to issue the policyholder of a bond with a chargeable event certificate. The certificate is issued to the owner of the bond, irrespective of who is taxable.
If the gain exceeds one half of the higher rate tax threshold (£18,700 for 2009/2010*) then a copy of the certificate must be sent to HM Revenue and Customs (HMRC).
If the policy has been issued as a series of smaller, identical segments, it’s the total gains of the smaller policies or segments arising that year which combine to calculate whether the gains exceed one half of the higher rate tax threshold. We’ll cover this in more detail in module 9 – how to calculate tax on the gain and top slicing.
The certificate must be issued within three months of most types of chargeable event.
*the higher rate tax threshold quoted above was correct in April 2009.
Both death and maturity of the policy are chargeable events. Which of the following occasions are defined as a chargeable event on a bond? You can find the answer at the end of this module.
Option 1 – Assignment for value
Option 2 – Marriage
Option 3 – Total surrender of policy
Option 4 – Partial withdrawals across all segments
Option 5 – Surrender of individual segments
We’ve learned that a tax charge arises on a bond for the following events:
When a chargeable event occurs then a chargeable event certificate is issued to the policyholder.
Answers to questions in module 8
Question 1
Both death and maturity of the policy are chargeable events. Which of the following occasions are defined as a chargeable event on a bond?
Option 1 – Assignment for value
Option 2 – Marriage
Option 3 – Total surrender of policy
Option 4 – Partial withdrawals across all segments
Option 5 – Surrender of individual segments
Answer
The correct answer is options 1, 3, 4 and 5:
And these are chargeable events too: