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Qualifying policy
The most frequent reason for using a qualifying life assurance policies is for investment purposes. Investment will be over a specified period of time and purpose, such as school fee planning, or to repay a mortgage linked to a property where investment and protection is required for the this joint life policy.

Another advantage for choosing a qualifying policy is the tax treatment as if affects the policyholders funds. The underlying assets are taxed at a rate of 20% on savings income, capital gains tax (CGT) and non-savings income are taxed at 22% and dividends are received net.

Furthermore the company's expenses can be offset against unfranked investment income, called the I-E formula, and this means that often there is little or no tax to pay on the policyholders funds. Qualifying policies can therefore be tax advantageous, although not to the degree of individual savings accounts (ISA), for higher rate taxpayers as there is no tax liability at maturity. Qualification will depend on the following:

The plan must have a term of at least 10 years;
The minimum life assurance cover must be 75% of the total premiums payable throughout the term.

If the policy is surrendered within the first 10 years or 75% of the term if sooner, there the gain could be liable to income tax as this is a chargeable gain. There will only be a chargeable gain if the surrender value exceeds the total premiums paid and then only if the policyholder is a higher rate taxpayer after the top-sliced gain is added to the income. The gain will attract a charge of 18%, this being the difference between higher rate and basic rate tax.

On divorce, nullity of marriage and judicial separation it is likely that where there is an endowment policy in joint names, the parties will want the policy assigned to one of the spouses. As long as the policy has run for 10 years or 75% of the term if sooner, there will be no chargeable event and no tax liability.

If the assignment is within 10 years or 75% of the term, there may be a tax liability if the top-sliced gain for each party's share of the policy when added to their individual income exceeds the higher rate tax threshold.

TEP market
Rather than assign the endowment policy to the other spouse as a result of ancillary relief proceedings, the parties may decide to encash the policy. This can be achieved by surrendering, or selling the policy on the traded endowment policy (TEP) market.

The advantage of the TEP market is that for any with-profits policy, a buyer will usually pay a higher value for the policy than the value received on surrender from the provider. Therefore the parties should seek advice from an independent financial adviser (IFA) before encashing the endowment policy.

The advantage to the buyer of a with-profits policy is that the eventual yield on maturity can be much higher than that produced from an interest bearing security, although the buyer will have to be prepared to pay the premiums to maturity. There may also be a windfall for the buyer if the original owner, that will still be the life assured, dies before the policy matures as this money is payable to the buyer.

On maturity the TEP, as a non-qualifying life assurance policy is subject to income tax. There will be a chargeable gain if the disposal value exceeds the premiums paid by both the buyer and the original owner. The price paid by the buyer for the policy is not considered for the calculation of income tax. Instead it will be the top-sliced gain added to the buyers income and only if this is higher than the higher rate tax threshold will there be a chargeable gain subject to tax.

There may also be a CGT liability on disposal and this is calculated in the normal way by deducting from the disposal proceeds the price paid, expenses, only the premiums the buyer has paid as well as indexation relief, taper relief and the personal CGT allowance. This gain will then be further reduced by deducting the amount of chargeable gain subject to income tax.
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