HS320 Gains on UK life insurance policies (2022) – GOV.UK
This helpsheet deals with chargeable event gains arising from UK life insurance policies. It covers the most common circumstances that you’re likely to come across when dealing with the taxation of gains on life insurance policies. These notes are generally applicable to individuals, trustees and personal representatives of a deceased person unless the notes say otherwise.
Chargeable event gains can also arise on purchased life annuities as well as capital redemption policies. If you believe you have 1 of these 2 types of policy, or your circumstances are more complex, you can find more detailed guidance in the Insurance Policyholder Taxation Manual.
In these notes ‘gains’ are chargeable event gains. They’re taxable as income although tax at the basic rate may be treated as paid on the gain in which case further tax will only be due from higher, or additional rate, taxpayers. They are not capital gains, so capital losses and the annual exempt amount cannot be set against them.
Please ask your insurer if you’re in doubt:
about what sort of policy you have
whether there has been a chargeable event gain
whether tax is treated as paid
Part 1 – Types of policy
This part will help you decide if you’ve made a gain because you received a payment or other benefit. The type of policy you have and the type and amount of any payment or benefit you received are all things that may affect whether you have to pay any Income Tax.
The sort of policy
For tax purposes, the most important distinction is between ‘qualifying’ and ‘non-qualifying’ life insurance policies. Qualifying policies usually do not give rise to a chargeable event gain unlike non-qualifying policies which often give rise to gains.
Qualifying policies
These policies generally have a minimum term of 10 years with fairly even premiums payable at regular intervals, such as weekly, monthly or annually. If the policy was taken out on or after 21 March 2012, or taken out before that date and varied afterwards, the premiums payable in any 12-month period by any beneficiary for all such policies must be less than £3,600 per year.
Qualifying policies generally do not give rise to chargeable event gains so if your insurer has sent you a chargeable gains certificate this could be because the policy has been surrendered or premiums have ceased within the first 10 years of the policy, the £3,600 premium limit has been breached, a statement has not been made to the insurer when required (see IPTM2090), or the policy has been purchased from a third party. Your insurer can tell you whether your policy was a qualifying policy, as they will know the details and history of your policy.
Non-qualifying policies
Non-qualifying policies are all policies that are not qualifying policies. Often these will be single premium life insurance policies, although additional premiums may be allowed.
Personal Portfolio Bonds (PPBs)
PPBs give rise to an annual charge. They are broadly policies that allow selection of the property by which the policy is valued unless the only property that can be selected is:
property appropriated by the insurer to an internal linked fund
units in an authorised unit trust
shares in an approved investment trust, or an overseas equivalent
shares in an open-ended investment company
certain cash deposits
certain life policies
interests in certain collective investment schemes
shares in a UK Real Estate Investment Trust or an overseas equivalent
an interest in an authorised contractual scheme
Most policies will not be PPBs and your insurer will be able to tell you if your policy is a PPB or not.
When will a gain arise
What gives rise to a gain
The most common occasions on which a gain arises are if during the year:
cash or other benefits were received on a full or part surrender of a policy
a policy matured or was brought to an end by the death of the life insured
there was a sale or assignment of a UK policy, or part of a policy, for value
the policy was a PPB, even if the insurer had not paid cash or other benefits during the year
If the calculations which are required following these events show that a gain has arisen, your insurer should send you a chargeable event certificate showing the gain. Part 5 of this helpsheet includes some examples which show how gains are calculated on each of these occasions.
How to report a gain
The gain should be reported in the tax return using supplementary pages SA101. Include the details of the gain under ‘Gains from life insurance policies, capital redemption policies and life annuity contracts’.
Chargeable event gain certificates
UK insurers are required by law to issue a certificate if they know that a gain has been made on a life insurance policy. In most cases, therefore, if you have made a gain you will have received a certificate reporting the gain, either directly from the insurer or indirectly via trustees or a lender.
No chargeable event certificate received — but a gain has been made
If you have not received a certificate, in most cases this will be because you did not make a gain. This could be because of your type of policy, for example, it is a qualifying policy, or what you did, for example, you assigned your policy as a gift. Alternatively, the amount of benefit received did not give rise to a gain.
However if any of the following circumstances apply, a gain may have arisen even though the person chargeable may not have received a certificate from their insurer.
The insurer may have sent the certificate to someone who is not liable for any tax due, for example, where the policy is held by:
the trustees of a:
trust you set up or contributed property
bare trust of which you’re a beneficiary
anybody holding a policy in their own name as your nominee
a lender to whom your policy was previously assigned as security for a debt of yours
If you believe this may have happened, you should check with the trustees, nominee or lender to find out whether the insurer has sent them a certificate and, if so, ask them for a copy.
2. The insurer has sent the certificate to the wrong address because, for example, the policyholder has changed address without telling their insurer. If this may have happened, you should contact the insurer to ask whether they issued a certificate to your old address and, if so, to request a copy.
3. The insurer may not know about the event giving rise to the gain. For example, a policy may be sold but neither buyer nor seller have advised the insurer that the life insured under the policy has died. If this has happened, you should contact the insurer to inform them of the event that has happened and you should also ask them for a chargeable event certificate.
Part 2 — When the gain is your income
Individuals
A gain will be treated as part of your income if you’re the:
‘beneficial’ owner of the rights under the policy — you’re likely to be the beneficial owner if you paid the premiums and you, or your estate after your death, are entitled to any benefits under the policy — you may be regarded as the beneficial owner in other circumstances, usually because you’re absolutely entitled to benefit from a policy — for example, you may be the beneficiary of a bare trust
owner of rights under a policy which is held as security for a debt of yours, such as a mortgage
person who either created or added property to a trust that holds the policy – the gain is treated as your income whether or not you’re entitled to benefit under the terms of the trust, unless the trust is a bare trust or a resulting trust, you’re entitled to recover from the trustees any tax that you pay on the gain
UK beneficiary of an overseas trust or entity — Helpsheet 262 Income and benefits from transfers of assets abroad and income from non-resident trusts explains more about such gains
UK resident trustees
A gain will be treated as income of trustees of a trust if the rights under the policy:
are held on charitable trust
are held on non-charitable trust and the person who created the trust is non UK resident or is a company or foreign institution that has been dissolved or wound up
are held on non-charitable trust and the person who created the trust has died, unless the gain arises in the same tax year in which the individual died
are held on non-charitable trust and no individual or personal representatives are otherwise chargeable
are held as security for a debt owed by the trustees
Personal representatives
A gain may be treated as income of personal representatives where it arises on a policy and it is not treated as:
income of a deceased individual
having been taxed at the basic rate
This may be the case for example, where a policy of life insurance owned by the deceased but taken out on the life of somebody else, is surrendered by the personal representatives, or matures while it is still an asset of the estate.
Dividing gains — joint owners
The rights under a life insurance policy are often owned by more than one person. The general rule is that each interested person is chargeable on the share of the total gain which is the same as their share in the policy rights or share of the debt which the policy is used to secure. For more complex cases, please refer to the Insurance Policyholder Taxation Manual.
Part 3 — Calculating a gain
Determining the amount of the gain
In most cases, the gain that has arisen will be shown on a certificate which the insurer will send to the policyholder. The certificate should also show whether tax is to be treated as paid on the gain and the number of complete policy years that the policy has run from commencement or from the previous gain.
If the policy has been sold or the policyholder believes that a gain has arisen but no certificate has been received then Part 5 explains how to calculate the chargeable event gains. If the result given by the calculation is zero or a negative amount, please refer to the section ‘Loss, or no gain, on the policy’.
Which year is a gain taxable
First make sure the gain is taxable in 2021 to 2022. The certificate may show one date or two dates relating to the event giving rise to the gain. If the certificate only shows one date then this is the date of the event. If this falls in the period 6 April 2021 to 5 April 2022 then it’s the tax year ended 5 April 2022 and the gain must be entered in this year’s tax return.
If the certificate shows two dates relating to the event, then only enter the gain on this year’s tax return if the later of these dates is in the tax year ended 5 April 2022. This may, for example, happen following a part surrender of the life insurance policy. All part surrenders in the same insurance year are treated as arising at the end of that insurance year. An insurance year, which may also be referred to as a ‘policy year’, is normally the 12-month period beginning on the anniversary of the date on which you took out the policy.
Example
A policy was taken out on 1 July 1997. The insurance year would therefore end on each subsequent 30 June until the policy ceases. If, therefore, a part surrender took place on 31 January 2021, a subsequent gain would arise at the end of the insurance year in which the part surrender took place. In this example, the gain would arise on 30 June 2021.
30 June 2021 falls into the 2021 to 2022 tax year so the gain would be returned for that year despite the part surrender having taken place in a different tax year.
In some cases the insurer may have sent you more than one certificate relating to a particular gain, with the later certificate showing a revised figure of benefits paid or amount of chargeable gain. In this case, you should enter the details shown on that later certificate.
End of a policy
If the event is a death or the maturity, sale or surrender of the whole of a policy, the gain is treated as income of the tax year in which the death, maturity, sale or surrender occurs.
Chargeable event gains – when to reduce the gain advised by your insurer
Restricted Relief Qualifying Policies (RRQP)
Your policy will most commonly be an RRQP if, it was issued before 21 March 2012 and varied after that date so as to increase premiums payable and you’re in breach of the £3,600 annual premium limit. A qualifying policy may become an RRQP in other circumstances, for example, following certain assignments and you’re in breach of the limit. More guidance on RRQP is in the Insurance Policyholder Taxation Manual.
If your policy is an RRQP, then the amount of the gain shown on the certificate is not the amount of the gain that needs to be included on your return. The policy attracts full relief for premiums paid in the period up to the date that it becomes an RRQP, or, if later, 5 April 2013. From that date relief is restricted to the balance of the annual premium limit not used up by your other qualifying policies that are subject to the annual premium limit. Your gain is reduced by the following formula:
Gain x (total amount of allowable premiums payable) ÷ (total amount of premiums payable)
The Insurance Policyholder Taxation Manual has an example calculation.
Time-apportioned reductions
If you have spent time outside of the UK during the period you were the beneficial owner of the policy, and you were non-resident in the UK for tax purposes during this time, you may be entitled to a time-apportioned reduction for the time you were non-resident in the UK. This will not be shown on your certificate and so any reduction will need to be calculated and deducted from the gain shown on your certificate.
A time-apportioned reduction may reduce a gain made on your policy if it was issued by a UK insurer on or after 6 April 2013, or your policy was issued before this date and has been varied or assigned on or after this date. A time-apportioned reduction is applied to your gain for periods during which you were not resident in the UK using the formula A ÷ B.
A equals the number of days that are foreign days in the material interest period. The material interest period is the part of the policy period during which you meet one of the following conditions:
you beneficially own the rights under the policy or contract
the rights are held:
on non-charitable trusts which you created
as security for your debt
Foreign days are all the days in a tax year for which you’re not UK resident and any days in a split year in which you’re taxed as if not UK resident, the overseas part.
B equals the number of days in the material interest period.
The Insurance Policyholder Taxation Manual has more information on time-apportioned reductions.
Chargeable events — tax reliefs
Top-slicing Relief
You should ignore this section if you’re a trustee or a personal representative of a deceased person who is taxable on a gain. This is because in these circumstances, you’re not entitled to Top-Slicing Relief.
Top-slicing Relief is generally available when you pay:
basic rate tax on your other income, excluding the gain, but when the gain is added to your other income, you have to pay higher or additional rate tax
higher rate tax on your other income, excluding the gain, but when the gain is added to your other income, you have to pay additional rate tax
In order to calculate the amount of the relief you will need to know the number of complete years. This should be clearly stated on the chargeable event certificate that your insurer must send you.
Top-slicing Relief is given in terms of tax rather than as a reduction to a chargeable event gain. Unlike RRQP and time-apportioned reductions full amount of the gain should be entered on the tax return.
The calculation of Top-slicing Relief can be complicated and it is not possible to give full details in this helpsheet.
The Insurance Policyholder Taxation Manual has detailed information on the calculation of Top-slicing Relief.
Where you can claim Top-slicing Relief and a reduction to your gain is available because your life insurance policy is an RRQP or you can claim a time-apportioned reduction then the calculation is done in the following order:
RRQP
Time apportioned reduction
Top-slicing Relief
Loss, or no gain, on the policy
The result of the calculation when a chargeable event arises may not be a positive amount. If so, you have not made a gain and should not therefore make any entries on your tax return.
If the result of a full surrender, death or maturity calculation is negative and you made no gains on the policy in earlier years, you have made a loss on the policy. There is no relief for that loss and you should not make any entries on your tax return. A loss on one policy can not be set against a gain on another policy.
If the result of a full surrender, death or maturity calculation is negative but you made gains on the policy in earlier years, then you may be able to claim Deficiency Relief.
Deficiency Relief
Deficiency Relief can be claimed if the:
chargeable event is one that brings the policy to an end through the surrender of all rights, a final participation in profits, death, maturity, or the taking of a capital sum as a complete alternative to annuity payments
calculation includes a deduction for earlier gains, other than PPB gains, which formed part of the policyholder income
policyholder has income chargeable at the higher rate or the dividend upper rate for the tax year in which the deficiency arises
Deficiency Relief reduces the amount of other income in the tax year of the deficiency that is liable to higher or dividend upper rate and is only available to individuals. It does not reduce the amount of tax due at the additional rate. Trustees or personal representatives are not able to claim. If you’re entitled to the relief, it’s the lower of the previous gains and the negative amount given by the calculation. Earlier gains typically arise from part surrenders or part assignments.
The Insurance Policyholder Taxation Manual has details about how to calculate the relief.
Part 4 — How to calculate a gain
There are different rules for calculating a gain on a:
full surrender or maturity
death
sale or assignment
part surrender giving rise to either:
a partial withdrawal of benefits
a payment of a cash bonus
an insurer making a loan
sale of part of a policy
part assignment other than by way of a gift
Your copy of the chargeable event certificate should tell you the gain or contain all the information, possibly apart from the sale price, that you need in order to calculate the gain.
On maturity or full surrender
A gain on maturity or full surrender should be shown on the certificate provided by your insurer, together with the amount of Income Tax treated as paid. If not, it’s calculated as TB minus (TD plus PG).
TB is generally the value of what you receive on maturity or full surrender plus the value of what has been received at any time previously under the policy with the exception of earlier critical illness of disability benefits.
TD is generally all amounts paid as premiums under the policy.
PG is all gains that were someone’s income for tax purposes, in a tax year before that in which your policy matured or was fully surrendered.
All of these amounts should be available from your insurer if you want to check the calculation. If you’re unable to work out the amounts of previous gains your insurer again may be able to help you.
The calculation can be more complex if you have a related policy. Related policies are typically derived from a maturity option where one policy matures and the proceeds are applied as premium for a new policy. Your insurer should be able to tell you if there were any policies ‘related’ to the policy giving rise to the gain. Insurance Policyholder Taxation Manual has more information.
On death
Calculate the gain on death using the same TB minus (TD plus PG) formula but in this case TB is the surrender value of the policy immediately before death rather than the amount receivable as a result of death. Ask your insurer to tell you the value if they have not already done so.
On sale
You also calculate a gain on the sale of all of a policy using the same formula as for maturity or full surrender, except that in this case TB is normally the sale price of the policy, or the value of any other consideration if the policy is not transferred for cash. If the sale is between connected persons, for example, a brother and sister, TB is the market value of the policy. But the transfer of ownership of a policy between spouses or civil partners who are living together does not give rise to a gain.
On part surrenders or part assignments — sales
Gains from part surrenders and part assignments of life insurance policies are calculated annually and arise at the end of each insurance year. The gain for an insurance year when there’s been one or more part surrenders is calculated as follows.
The value of all parts surrendered less unused one twentieth of the premiums paid in the year and each previous year.
This is subject to a maximum of 100% of the premiums paid, which will be reached if 5% of the premiums are taken for 20 consecutive years.
For part assignments the calculation is the same apart from the value used for TB which is the value of the part sold rather than the part surrendered.
If, following a part surrender, or part assignment, of a policy, the persons liable to tax on the gain consider that the gain arising is wholly disproportionate they can apply to HMRC to have the gain recalculated on a just and reasonable basis.
Wholly disproportionate gains tend to arise early in the life of a policy often because policyholders have taken cash from their policy that is far in excess of their 5% tax deferred allowance.
You can find more information on who can apply and the application process in the Insurance Policyholder Taxation Manual.
Part 5 — Examples of calculations
Examples of the calculation of the gain on maturity or full surrender using the formula
TB minus (TD plus PG).
Example 1
On maturity a policy pays £10,000 (TB).
The premiums paid total £4,000 (TD).
In this example there are no earlier gains.
The gain is (£10,000 – £4,000) = £6,000.
Example 2
As a result of the death of the person to whom the tax return relates, a payment of £10,000 arises.
The surrender value immediately before death is £8,000 (TB). The premiums paid total £4,000 (TD).
In this example there are no earlier gains.
The gain is (£8,000 – £4,000) = £4,000, and the gain is treated as income of the deceased for the year of death.
Example 3
Policy is sold for £10,000 (TB).
The premiums paid total £5,000 (TD).
The gain is £10,000 (TB) – £5,000 (TD) = (£5,000).
Examples of the calculation of a gain on part surrender
Example 4
Part surrenders are made in the year to 24 May 2021 of £250 and £3,450.
The life insurance policy was made on 25 May 2015 and the initial and only premium was £10,000.
For the year to 24 May 2021 the value of the parts surrendered was £3,700.
One twentieth of the premiums for the year to 24 May 2021 is £500. One twentieth of the premiums for each previously completed year is £500 × 5. Total allowable payment is therefore £3,000.
The calculation is £3,700 – £3,000 = £700.
A gain of £700 arises on 24 May 2021, assessable in 2021 to 2022.
Example 5
Part surrenders are made in the year to 31 October 2021 of £1,500.
In each previous year part surrenders of £400 were taken each year.
The life insurance policy was taken out on 1 November 2016 with a single premium of £10,000.
For the year to 31 October 2021 the value of the parts surrendered was £1,500. In the 4 earlier years, £1,600 had been taken from the policy. Total value of parts surrendered are therefore £3,100.
One twentieth of the premiums for the year to 31 October 2021 is £500. The allowable elements for the 4 earlier years total (4 × £500) = £2,000. Total allowable payments are £2,500.
The calculation is the value of rights surrendered £3,100 – allowable payments £2,500 which gives rise to a gain of £600.
The £600 gain arises on 31 October 2021 and is chargeable to Income Tax in the 2021 to 2022.
Get more information
For more information about online forms, phone numbers and addresses contact Self Assessment: general enquiries.
