Life insurance policies ― top slicing relief

By Tolley
Life insurance policies ― top slicing relief

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

  • Life insurance policies ― top slicing relief
  • Taxation of life insurance gains
  • Top slicing relief
  • One chargeable event gain
  • More than one chargeable event gain
  • Interaction with the personal allowance
  • Interaction with the savings nil rate band
  • Interaction with high income child benefit charge
  • Interaction with the annual allowance
  • Tax planning

The profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains) and taxed last after all other income (ie top sliced) in the income tax computation. Usually the gain has a 20% deemed tax credit attached, which means that if the policy-holder is a basic rate taxpayer they do not have any further tax to pay. For more on the tax credit and the reporting of life insurance gains, see the Life insurance policies guidance note. You should read that note before continuing as the commentary below assumes familiarity with the terms discussed in that guidance note.

Different rules may apply to foreign policies and these are covered in the Offshore bonds and other foreign policies guidance note. That guidance note also explains how to find out if your client has a foreign policy.

However, there is an inherent unfairness in treating the life insurance gain as income in one year; the profit has actually accrued over the lifetime of the policy but due to these provisions is subject to tax all in one year. This can be advantageous if the taxpayer is able to ensure their other income is low enough to allow all the life insurance gain to be taxed at the basic rate (see below). It is a disadvantage where the gain means that the taxpayer pays more tax than they would have done had the gain had been taxed a proportionately across the life of the policy and in this situation the taxpayer is entitled to top slicing relief.

Deficiency relief is discussed in the Life insurance policies ― deficiency relief guidance note.

Changes to the top slicing relief calculation have been introduced by Finance Bill 2020 for chargeable event gains that occur on or after 11 March 2020. See ‘Calculation rules for the purposes of

More on Savings income: