Endowment tax & compensation


Thom Baguley

I'm trying to find out the tax situation on cashing in a unit-linked endowment
early (under ten years) and taking the compensation offered by the endowmnent
company. The compensation letter mentioned a potential tax liability, but was
less than clear. I'm going to phone the company, but wanted to get some advice
before-hand (on the assumption they might get the tax sitaution wrong). I've
tried the IR web site, but failed to find the relevant documents. Does anyone
know any pointers to web sites with useful information on this?




Rob Graham

If a qualifying endowment policy is encashed before threequarters of its
term or ten years, whichever is shorter, the proceeds (i.e. the gain, not
the whole sum) are liable for taxation. The tax is only at higher rate
(40% - 22% = 18%) if applicable, and although you may not be a higher rate
payer at the moment, encashment may push you there. The calculation is
complicated. If it's not a qualifying policy then it's liable for taxation
anyway. I suspect your policy is qualifying, but do some sums before you
act. Life policy taxation is a subject in itself.

Rob Graham


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