Understanding Tax Liability on Qualifying Onshore Endowment Policies

AB

Philip took out a qualifying onshore endowment policy for 20 years, which means that the policy meets certain criteria set by HM Revenue and Customs (HMRC) and is eligible for certain tax benefits.

In year 9, Philip made the policy paid-up, which means that he stopped making premium payments and the policy's benefits were reduced accordingly.

As a result of making the policy paid-up, Philip may become personally liable to tax on the policy proceeds. The tax liability will depend on the circumstances under which the policy proceeds are paid out.

Option A states that Philip will become personally liable to tax on the policy proceeds at maturity. This is not necessarily true because the policy may mature without any payment being made, in which case there would be no tax liability.

Option B states that Philip will become personally liable to tax if he makes a partial surrender. A partial surrender is when the policyholder withdraws some of the policy's benefits before maturity. If Philip makes a partial surrender, he will be liable to tax on the portion of the benefits that exceed the premiums paid into the policy.

Option C states that Philip will become personally liable to tax if he assigns the policy to his wife. Assigning a policy means transferring ownership of the policy to someone else. If Philip assigns the policy to his wife, he may be liable to tax on the policy proceeds if his wife is not his spouse or civil partner.

Option D states that Philip will become personally liable to tax on settlement of a critical illness claim. If Philip has a critical illness and makes a claim on the policy, he will receive a lump sum payment. This payment may be subject to tax if it exceeds the premiums paid into the policy.

In summary, the correct answer is option B - Philip will become personally liable to tax if he makes a partial surrender.