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HMRC internal manual

Capital Gains Manual

Life insurance policies/deferred annuities: exemption for second hand policies: disposals from 9 April 2003: exclusions from the exemption

As CG69040 explains, the exemption for Capital Gains Tax purposes for life insurance policies is not universal - ‘second hand’ policies are not exempted. For disposals on or after 9 April 2003 the exemption generally given by TCGA92/S210 (2) is not due if

  • (on a disposal of the rights conferred by a life insurance policy or deferred annuity) the rights themselves or any interest in the rights, or
  • (on a disposal of an interest in the rights conferred by a life insurance policy or deferred annuity) the rights themselves, or the interest in those rights that is the subject of the disposal or any interest from which that interest was directly or indirectly derived

has at any earlier time been acquired by any person for ‘actual consideration’ - see CG69051 regarding what counts as ‘actual consideration’.

Broadly, the effect of this is that the rights conferred by a policy are exempted in the hands of the person who takes out a life insurance policy, and anyone who acquires the rights conferred by the policy (or an interest in those rights) from the original policyholder by way of a gift, or an unbroken chain of gifts. But once ‘actual consideration’ has been given for the rights, or any interest in the rights, the exemption is lost and any gain on a subsequent disposal of the rights is a chargeable gain.

Similarly, an interest in the rights is exempted if no actual consideration has ever been given for that interest, for an interest from which that interest was directly or indirectly derived, or for the rights themselves. But any interest derived, directly or indirectly, from rights (or from an interest in rights) acquired for ‘actual consideration’ is not exempted. See CG69052 for an example of how the exemption can cease to be available as interests in the rights conferred by a life insurance policy are directly and indirectly derived when interests in the policy are created and merged.