Life insurance policies

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Life insurance policies
  • Qualifying policies
  • Non-qualifying policies
  • Taxable income
  • Partial surrenders
  • Periods of non-residence
  • Interaction with the temporary non-residence rules
  • Foreign life insurance gains
  • Jointly held policies
  • More than one chargeable event in the year
  • Interaction with personal allowances and child benefit
  • Interaction with capital gains tax

Life insurance products are used either:

  • to pay out a sum of money to a beneficiary when someone dies, or
  • as an investment vehicle to provide a return on an investment in much the same way as other savings-type products (for example, an endowment policy attached to a mortgage)

The tax treatment of these insurance policies depends on whether they are considered to be qualifying or non-qualifying.

In general terms, where the policy is non-qualifying there is anti-avoidance legislation in place to charge any profit made on encashment to income tax rather than capital gains tax. This is different from the normal rules whereby profits on most investment products (eg shares, unit trusts, etc) are chargeable to capital gains tax. To confuse matters, although the profit is charged to income tax rather than capital gains tax it is normally referred to as a ‘life insurance gain’ or a ‘chargeable event gain’.

The policy-holder can defer the income tax charge by partially surrendering the non-qualifying policy (up to certain limits, see below).

This area of the legislation is very complex, however in almost all cases the insurer should do the hard work by producing a certificate showing all the information needed to report the gain on the Tax Return, including the calculation of the gain.

This guidance note discusses qualifying and non-qualifying policies, the calculation of the chargeable event gain, and the interaction with various provisions. For the taxation of chargeable event gains, including top slicing relief and deficiency relief, see the Taxation of life insurance gains guidance note.

Qualifying policies

There is not normally an income tax charge when qualifying insurance policies are encashed. Therefore, it is important to know whether the policy is qualifying or non-qualifying.

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