Tax Issues

The two areas of tax covered below are:

1. Tax charged when selling your endowment policy
2. Tax charged on endowment mis-selling compensation

Tax charged when selling your endowment policy

If you are the original beneficial owner of the policy that is to say if you were the person who took it out, there is no tax liability on the proceeds of the sale of the policy. As you may be aware, income tax will already have been paid on any dividend income generated by the policy's investments. When you sell a policy that you originally took out you have no income tax liability and nor will you be liable to capital gains tax.

If you are not the original beneficial owner of the policy, Capital gains tax charged when selling a policy is a complicated issue, there are circumstances in which you may not have to pay capital gains tax but these must be looked into in great detail. We considered mentioning here specific advice about tax but after consulting our tax advisor we felt it best not to suggest guidelines which may not be correct in all cases. If you have any doubt you should contact a qualified, regulated advisor.

Tax charged on Endowment mis-selling compensation

On 19 August the Inland Revenue announced that any "enhanced" element is subject to tax. Some people have received this "enhanced" element within their compensation awards. It is an additional payment, which has been awarded for loss of interest that the investor might have earned if he or she had not put the money into the mis-sold product.

The Revenue believes that this additional payment should be taxable.

Many firms who sold financial products inappropriately in the last few years, such as endowment mortgage policies, have been ordered to compensate their customers. Some firms have deducted tax from the "enhanced" part of the compensation payments, others have not. The amount of money the Revenue refers to as interest is taxed at the savings rate - 20% for basic rate taxpayers (which should have been deducted by the insurance company already) and then another 20% for a higher-rate (or 40%) tax payer.

If you have received a compensation payment then check the paperwork you got with it. If this indicates that you were receiving an "enhanced" payment element then the next step is to see if you were sent a certificate showing interest - part of the payment - was withheld. You should then consider whether, in the year you received the interest, you were a higher-rate tax payer during that tax year. If you were, you may have additional tax to pay.

You may need to contact the Inland Revenue to help you work through this. On the other hand if you received a compensation payment which mentioned an enhanced payment but the insurance company did not deduct tax from that, then contact the Revenue district dealing with your tax affairs and work through the documentation with them.

The bottom line is do not panic if you are in doubt, but talk to your local tax office today.