Q: How do you know if a chargeable event gain has arisen?
A: Firstly you need to determine the circumstances causing the chargeable event. The type of event will determine the type of chargeable event gain calculation required and, indeed, when the chargeable event gain takes place. There are generally two types of chargeable event gain calculation:
- Final chargeable event gain.
- Excess chargeable event gain.
Q: What’s the difference between a final gain and an excess gain?
A: A final chargeable event, as the name suggests, takes place when the bond, or segments of the bond, end. Events such as surrender in full or segments, death of the life assured giving rise to benefits and maturity are all final chargeable events.
An excess chargeable event happens when withdrawals are made above a certain limit, but the bond continues with all the segments intact. Part assignments for money or monies worth, and regular or partial withdrawals in excess of the 5% tax deferred allowance are excess chargeable events.
Q: Why is the excess gain so high when the bond might not made any profit?
A: Chargeable event legislation states that where withdrawals in the policy year exceed cumulative 5% allowances then a chargeable event gain will arise. It is important to remember that this ‘mechanical’ calculation bears no correlation to the economic performance of the bond.
Q: When is a gain calculation done?
A: A final chargeable event gain is calculated immediately.
An excess chargeable event gain calculation is done at the end of the policy year.
