My friend's husband died leaving a Prudential Endowment policy. The sum of £12,000 was paid to his widow. Is that sum subject to tax?
No, not in this instance. If the proceeds of the policy had been paid to the deceased's estate and then passed to someone other than the spouse, a charity, or a political party then Inheritance Tax might be payable, depending on the total size of the estate and the amount of Nil Rate Band allowance available in the year of death. This year's NRB is £ 325,000, subject to no gifts having been made in the previous 7 years. anything over that is taxed at 40%, unless it is business property or certain other assets. | 07.05.11 @ 17:52
Agree with James. Endowment policies are typically "qualifying". This means that so long as they abide by certain rules the proceeds should be tax free on death - so long as the policy was not 'paid up' before the death occurred (i.e. premium payments had stopped making the plan 'paid up').
Whatver the qualification status there is an assumption that basic rate tax has been paid - so a benficiary should never face more than the marginal rate of tax. | 07.08.11 @ 17:43
Although James is right in terms of IHT and Spousal exemption (assuming UK domicile and no other substantial assets).
the issue of qualifying rules is more tricky as it will require information that might not be known to the beneficiary.
if the policy is surrendered either in whole or in part within the first 10 years or three quarters of its term whichever is the earlier or on death, surrender or maturity of a policy which has been made paid up within the period referred to above, then it would lose its qualifying status and therefore some tax might be payable but it would generally be a small sum based on the amounts mentioned.
| 07.15.11 @ 14:40