The Process

• The seller has to execute a deed of assignment in favour of the buyer and hand the policy over to them; 
• The buyer should serve notice on the life office to protect their interest and to prevent the life office paying the original owner by mistake; 
• The buyer will be responsible for premiums falling due after the sale and will have to make arrangements to pay them; 
• It is advisable for the buyer to keep in touch with the life assured so as to be aware of any death claim; 
• Some market makers (i.e. life offices) are willing to buy back policies sold by them. This increases the liquidity of the investment and is, in effect, a tertiary market. 

Taxation in the second hand market

Taxation on the seller

• If a qualifying policy is sold after at least ten years, or three-quarters of the term if sooner, the sale is not a chargeable event and there is no income tax; 
• If a qualifying policy is sold within the ten-year period, or three-quarter term, the sale is a chargeable event and if a non-qualifying policy is sold, the sale is always a chargeable event.
• If the sale is a chargeable event, the seller will make a chargeable gain where the sale price exceeds the total premiums paid. 
• If the seller is a higher rate or additional rate taxpayer, the gain is subject to higher rate or additional rate income tax, less basic rate tax. The gain is subject to top-slicing relief. 
• There will be no CGT liability on the sellers, provided they are the original beneficial owners. 

Taxation on the buyer

Income tax

• If the buyer holds a qualifying policy to maturity, or to a death claim, there is no chargeable event and thus no income tax liability. 
• If the buyer holds a non-qualifying policy to maturity, or death claim, this is a chargeable event.
  • There will be a chargeable gain if the maturity value (or surrender value immediately before death on a death claim) exceeds the total premiums paid by the buyer and the seller; 
  • The purchase price paid by the buyer does not enter into the calculation. If a gain arises, buyers will pay income tax at their highest rate less the basic rate, subject to top-slicing relief. 

CGT

There may also be a CGT liability because the claim is a disposal that has been made by someone who is not the original beneficial owner and who acquired the policy for consideration. The CGT situation takes no account of whether the policy is qualifying or not, although the taxable capital gain is reduced by any amount which is subject to income tax, i.e. a chargeable gain. Therefore it is unlikely that the same policy will be subject to income tax and CGT.