The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
Life insurance products are used either:
•as an investment vehicle to provide a return on an investment in much thesame way as other savings-type products (for example, an endowment policy attached to a mortgage)
In general terms, where thepolicy 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 thenormal rules whereby profits on most investment products (eg shares, unit trusts, etc) are chargeable to capital gains tax. To confuse matters, although theprofit 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 theincome tax charge by partially surrendering thenon-qualifying policy (up to certain limits, see below).
This guidance note discusses qualifying and non-qualifying policies, thecalculation of thechargeable event gain, and theinteraction with various provisions. For thetaxation of chargeable event gains, including top slicing relief and deficiency relief, see theTaxation of life insurance gains guidance note.
There is not normally an income tax charge when qualifying insurance policies are encashed. Therefore, it is important to know whether thepolicy is qualifying or non-qualifying.
Definition of a qualifying policy
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