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Capital gains tax on a ‘second hand’ endowment policy

21 November 2014   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: My client is a pensioner who made an investment switch from a "second hand” endowment policy, from which he withdrew a few hundred thousand rands. The document given to him by the insurance company with which he had the endowment policy is not an IT3(c), but it did state that he might be liable for capital gains tax. In my opinion we have to declare this; then again he would be liable for a lot of tax (additional to what he paid) as he is kicked in to a higher tax bracket.

A: A capital gain arises when there is a disposal or part-disposal and we certainly believe there was a disposal here.  Generally a person must disregard any capital gain or loss determined in respect of a disposal that resulted in the receipt by or accrual to that person of an amount derived in the circumstances set out in paragraph 55(1)(a) to (d).  

SARS explains the tax consequences of these policies as follows in their guide:

"A ‘second-hand policy’ conventionally refers to a policy that has been ceded absolutely to an independent third party on the traded policy market.  Capital gains and losses arising on the disposal of such a policy will be subject to CGT in the ‘second-hand’ recipient’s hands unless specifically excluded by paragraph 55.”  

We don’t have enough information to provide the guidance required, but it certainly seems that your view is correct.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.

Comments...

Llewellyn L. Krause says...
Posted 11 May 2015
how is endowment policies taxed

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