Income tax can be charged on gains treated as arising from
certain life assurance policies, capital redemption policies and
In this article and the next article we consider the
circumstances in which persons are assessed on those gains and so
may be liable for the payment of any income tax. The articles
will not cover annuities or company-owned policies (gains to UK
companies are taxed under the loan relationship rules) and the
expression 'life assurance policies' includes capital redemption
Chargeable event gains made under life assurance policies owned
by individuals, or held on non-charitable trusts established by an
individual, are potentially subject to income tax.
An investment gain (called a 'chargeable event gain') can arise
when a chargeable event occurs. (See section 2 below).
Special rules apply in the calculation of chargeable event gains
For example, in calculating a CEG which arises on death, the
surrender value immediately before death is used, not the amount of
the death benefit paid - this ensures any mortality profit is not
taxed. Also a withdrawal of up to 5% of the premium can be taken,
tax-deferred, for 20 years but when a termination chargeable event
occurs any such withdrawals are added back to calculate the
overall gain on the policy. Another example of a special
calculation is where non-resident relief could apply. In
which case, broadly, the amount of the CEG is reduced to reflect
any period during the currency of the policy for which the person
liable for payment of the tax was not resident in the UK.
CEGs arise primarily under non-qualifying policies. All
policies issued on or after 18 November 1983 by offshore companies
are non-qualifying. Policies issued by a UK company can be
qualifying or non-qualifying. For a policy to be qualifying
then, broadly speaking, the premiums must be regular and paid at
least annually, there must be at least a minimum prescribed sum
assured payable on death and there must be a premium payment term
of at least 10 years. All gains arising under a qualifying policy
will, in most cases, be free of income tax. By its very
nature a single premium investment bond is therefore a
The following 6 occasions are chargeable events under section
484(1) Income Tax (Trading and Other Income) Act (ITTOIA) 2005. On
the happening of one of these events, a UK income tax charge can
arise on a non-qualifying policy.
(i) The death of any life assured that gives rise to the payment
of benefits under the policy.
(ii) The maturity of the policy.
(iii) The full surrender of the policy.
(iv) The assignment of the whole of the rights under a policy
for consideration in money or money's worth.
(v) Part surrender or assignment of part of the rights under the
policy for consideration where:-
(a) the amount payable by way of surrender exceeds the total of
unused 5% allowances as calculated under section 507 ITTOIA 2005,
(b) on assignment the surrender value of the policy before
assignment less the value of the interest retained by the assignor
exceeds the total of unused 5% allowances as calculated under
section 507 ITTOIA 2005.
(vi) A notional chargeable event will arise at the end of the
policy year in relation to certain personal portfolio
The CEG legislation is contained in Chapter 9 Part 4 ITTOIA
2005, and categorises the persons liable for income tax as
individuals, personal representatives and trustees. In the
remainder of this article we look at the position where a policy is
not held under trust which means the liability for the payment of
any income tax can fall on an individual or personal
In the next article we will look at the position where a policy
is held under trust - here the liability could fall on an
individual or trustees.
WHERE A POLICY IS NOT HELD UNDER TRUST
(a) Where a policy is owned by a UK
Apart from gains arising on the assignment of part of the rights
under a policy for consideration which are assessed to tax on the
assignor (further consideration of this is beyond the scope of this
article), gains are assessed on the person who beneficially owns
the rights under the policyimmediately before the happening of the
- In the case of an own life own benefit policy - this will be
- In the case of a life of another policy - this will be the
- In the case of a policy which has been assigned by way of gift
- chargeable events after the assignment - this will be the
- In the case of a policy assigned for consideration in money or
money's worth and the assignment itself gives rise to a chargeable
event, this will be the assignor. On any subsequent dealings by the
assignee giving rise to a chargeable event - the assignee will be
- In the case of a policy held as security for a debt, this will
be the debtor.
(b) Where a policy is owned by a non-UK resident
The position where a chargeable event gain occurs when the
person who beneficially owns the rights under the policy is non-UK
resident is modified by section 465 ITTOIA 2005. Under
section 465, HMRC will not seek tax where an individual is not
resident in the UKat any time duringthe tax year in which the
chargeable event occurs. If they are resident for part of the
tax year and the split year rule applies, a gain arising during the
part of the tax year in which the individual is UK resident will be
If a policy is effected by an individual when they are UK
resident and a CEG arises when that individual is "temporarily
non-UK resident", the CEG is calculated as if the individual had
been UK resident. The CEG is assessed on the individual in
the tax year during which the individual returns to the
An individual is temporarily non-UK resident if all of the
following conditions are satisfied:-
(i) They are only UK resident for a residence period and
immediately following that period one or more residence periods *
occur for which they are not solely UK resident; and
(ii) In 4 or more of the 7 tax years immediately preceding the
year of departure from the UK the individual is either only UK
resident for the tax year (or the year must have been a split year
that included a residence period for which the individual is only
UK resident); and
(iii) The temporary period of non-UK residence is 5 years or
* A residence period is normally a tax year. However, when
a tax year is a split tax year (ie. an individual is UK resident
for part of a tax year and overseas resident for the remainder) the
UK part and overseas part of the split year are treated as separate
c) Where a policy is held under multiple
Where a policy is owned by two or more individuals who are
accountable for the payment of tax on a chargeable event gain,
(such individuals are said to have a "relevant interest"), such as
two individual beneficial owners, each such owner is treated as the
sole owner of the policy as regards their share of the gain.
Any CEG is apportioned between the owners in proportion to their
interests in the policy. Such an apportionment is also
necessary where the same individual has different relevant
interests in the same policy. In applying these provisions
where a policy is used as security for a debt or debts, any CEG is
apportioned on the basis of the share of the actual debt or debts
for which each debtor is responsible.
The above provisions would seem to apply only where ownership is
on a tenancy in common basis. Where beneficial ownership of
the policy is on a joint tenancy basis then, for chargeable event
purposes, each joint owner is treated as owning an equal share of
the rights under the policy and as a consequence any CEG will be
apportioned amongst the beneficial owners equally.
(d) Where a policy is held by personal
Where the life assured is different from the person who
beneficially owns the rights under the policy, or the policy is a
capital redemption policy which has no life assured, then the
policy will continue in force following the death of the person who
beneficially owns the rights under the policy.
In this situation the policy will pass into the estate of the
deceased and the personal representatives (PRs) will hold the
rights in the policy. The PRs could then vest the legal title
to the policy in the beneficiary entitled under the Will.
This action would not give rise to a chargeable event and any
subsequent CEGs would be assessed to tax on the beneficiary.
Alternatively, the PRs could encash the policy during the
administration of the estate. In this case the PRs would be
liable for income tax at 0% (UK policy) or 20% (offshore policy) on
On distribution of the cash proceeds to the beneficiary under
the Will any CEG would be treated as income of the deceased's
estate. The CEG would be treated as ordinary income in the
hands of the beneficiary with a tax credit for any tax paid by the
PRs on an offshore policy and a 20% tax credit on a UK
policy. As the CEG is treated as estate income top-slicing
relief would not be available.
(e) Non-resident relief and top-slicing
These two reliefs are only available where the person assessed
to tax on a CEG is an individual.
For information on non-resident relief please refer to section 1
Top-slicing relief is the mechanism which is used to determine
whether any higher/additional rate income tax liability is payable
on a CEG by, broadly, averaging the CEG over the number of complete
years for which a policy has run.
For a termination event, such as death, years are counted from
inception of the policy. For policies under which an excess
arises (ie. when withdrawals in a policy year exceed cumulative
unused 5% annual allowances for that year), years for top-slicing
relief are measured from inception of the policy for the first
excess, and for second and subsequent excesses years are counted
since the last excess.
In the next article we will cover the position where a policy is
held under trust.