Life insurance policies

By Tolley
  • (Updated for Budget 2020)

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 thesame 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 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 area of thelegislation is very complex, however in almost all cases theinsurer should do thehard work by producing a certificate showing all theinformation needed to report thegain on thetax return, including thecalculation of thegain.

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.

Qualifying policies

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

The definition of a qualifying policy is complicated. For policies issued before 21 March 2012, a qualifying policy is, broadly, one which:
•insures either theindividual or his spouse / civil partner (with assignments of thepolicy restricted from 6 April 2013, see below)
•secures a

More on Savings income: