Tax charged after 8 years of life assurance policy

My mother in law took out a life assurance policy in 2008. She received a letter stating that circa 500 Euro tax had been deducted from the "Policy value".

According to the letter the "tax deducted was based on the amount at which the policy value exceeded the premiums which had been paid as at the eight anniversary" of the policy.

My mother in law was disappointed as she doesn't have a private pension. She relies solely on the state pension. She is 66 and doesn't want to query the tax.

It's not clear what sort of tax it is. I'm trying to figure out whether it's capital gains or DIRT. I presume it's not income tax.

Any ideas?

It sounds like 'exit tax' - which is charged at 41%. If you google 'exit tax' you will get all the nitty gritty details.

Are you certain your mother-in-law has a life assurance policy and not an investment policy? There is a government levy of 1% on term life assurance premia. On investments made via investment undertakings or life assurance policies the investment can grow tax free until a chargeable event occurs. A chargeable event includes, inter alia, the ending of an 8-year period beginning with the inception of the life policy and each subsequent 8-year period beginning when the previous one ends.

PMU said:

Are you certain your mother-in-law has a life assurance policy and not an investment policy? There is a government levy of 1% on term life assurance premia. On investments made via investment undertakings or life assurance policies the investment can grow tax free until a chargeable event occurs. A chargeable event includes, inter alia, the ending of an 8-year period beginning with the inception of the life policy and each subsequent 8-year period beginning when the previous one ends.

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Yes, it does appear to be a life assurance policy. The first line of the letter reads "Your policy recently passed its eight anniversary. In accordance with current Irish tax laws for life assurance policies a tax liability arose".

You can blame Michael Noonan for this one. He wasn't happy that people were saving and not spending. There's a ton of money that people have invested and not touched. As tax wasn't paid on these investments until the money was drawn down, Noonan didn't get to generate any tax income from them. So he came up with an idea that every 8 years, you have to pay tax on your gains, regardless of whether you took the money out or not. If you have the money with an insurance company, they do it all for you.

If the value of the fund subsequently falls and you take your money out, you can claim back overpaid tax from the Revenue.

It's up there with the AMRF in things that don't make sense.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)