Life insurance policies: deficiency relief
Relief when losses arise on certain life policies and similar investments is being extended to ensure it provides relief to 50% taxpayers as well as 40% taxpayers.
Where gains are made on some life policies, the policyholder is taxable on the gain. Gains can arise where there are partial surrenders in excess of limits determined by the premium paid and the number of years the policy has been running. When the policy is finally surrendered the overall gain on the policy may be less than the amount that has been taxed as a result of partial surrenders of the policy. Under current legislation the policyholder obtains relief for this deficiency against tax payable at the upper rates but not basic rate tax. With the introduction of 50% higher tax rates from 6 April 2010, this measure ensures that the deficiency can also be relieved against tax chargeable at the higher rates.
Current rules have permitted tax avoidance where a non taxpayer or basic rate taxpayer withdraws funds in excess of the permitted limits triggering a gain that is not taxable. The policy was then transferred to an upper rate taxpayer who surrendered it generating a deficiency which gave relief for tax at the upper rates. Anti-avoidance provisions are also being introduced to prevent taxpayers obtaining relief in excess of the tax that they have already suffered.
Who will be affected?
Taxpayers surrendering life policies, capital redemption policies and annuity policies.
On chargeable events on policies after 6 April 2010.
We welcome the extension of the relief to the additional rate of tax as providing fairness for taxpayers. The anti-avoidance provision was expected and seems targeted and proportionate.