CG69060 - Insurance: life insurance policies and deferred annuities: computation of gains
In computing the gain on a disposal of the rights conferred by a life insurance policy, or an interest in those rights, the allowable expenditure is
- subject to the Capital Gains Tax rules substituting some other amount the consideration in money or money's worth given for the acquisition of the rights, or interest in the rights, and
- the total amount of any premiums paid by the person making the disposal.
All the sums are regarded as being expenditure under section 38(1)(a) of the Taxation of Chargeable Gains Act (TCGA) 1992 and none under section 38(1)(b) TCGA 1992 - see CG15150P.
See CG69044 regarding valuations if the normal rules of Capital Gains Tax (such as section 17 TCGA 1992 - consideration given replaced by market value if transaction not a bargain made at arm's length) require that some valuation is used in the computation.
Disposals from 9 April 2003 and interaction with Income Tax
In computing the gain or loss on a disposal of the rights conferred by a life insurance policy or deferred annuity, or an interest in those rights, the normal rules in section 37 TCGA 1992 and section 39 TCGA 1992 operate to exclude amounts charged to Income Tax as income of the person making the disposal or which are allowable in computing income - see CG14300+.
The guidance at CG69001 explains that some life insurance policies and annuities can generate an Income Tax liability under the Chargeable Event Gain rules. Chargeable Event Gains are computed under those rules on a different basis to chargeable gains for the purposes of Capital Gains Tax. The interaction between the two codes was considered in Drummond v HMRC. In that case a small Chargeable Event Gain arose on the surrender of a second hand life insurance policy. The Court of Appeal concluded that in computing the chargeable gain accruing on this disposal the Chargeable Event Gain should be excluded from the disposal consideration as it had been charged to income tax as income of Mr Drummond.
It is nonetheless possible for the differences between the two codes to result in computations made by simply applying section 37 TCGA 1992 giving rise to losses for the purposes of Capital Gains Tax greater than the losses (if any) that a taxpayer had really incurred.
For disposals on or after 9 April 2003, section 210 TCGA 1992 restricts the amount of any loss for Capital Gains Tax purposes on the rights under a life insurance policy or deferred annuity to that which the taxpayer really incurred. section 210(7) TCGA 1992 provides that section 210(8) TCGA 1992 restricts any loss on a disposal to the amount of the loss that would have arisen on the disposal if section 37 TCGA 1992 and section 39 TCGA 1992 were disregarded.
This restriction has no practical effect if the exemption described in CG69042 is due so that any gain on the disposal would not have been a chargeable gain as, in those circumstances, any loss is not an allowable loss anyway - see section 16(2) and CG15800. But if, on or after 9 April 2003, a taxpayer
- disposes of the rights, or an interest in the rights, conferred by a life insurance policy or deferred annuity contract, and
- the exemption is not due, and
- a loss arises from the 'normal' computation
you have to re-compute the loss disregarding section 37 TCGA 1992 and section 39 TCGA 1992. If the result of the second computation is a loss, the amount of the loss allowable for the purposes of Capital Gains Tax is restricted to the smaller figure. If the result of the second computation is a gain (or arithmetically gives no gain or loss), there is no allowable loss. Note that any gain that results from the alternative computation is not a chargeable gain - the effect of the legislation is only to limit losses. There is an example of the comparative computation you have to make below.
If the loss of the person making the disposal is restricted by these rules, this does not have any effect at all on the Capital Gains Tax position of the person who acquired the rights or interest in the rights - section 210(9) TCGA 1992.
For disposals on or after 6 December 2006 you may also need to consider the Targeted Anti-Avoidance Rule ('TAAR’) to be found at section S16A TCGA 1992. Where that legislation applies to a capital loss, the loss is not to be an “allowable loss” and may not be set off against chargeable gains or income, see CG15835.
This example illustrates the way losses may be restricted for disposals on or after 9 April 2003 of the rights (or an interest in the rights) conferred by a life insurance policy or deferred annuity.
Example
A taxpayer acquired a life insurance policy for actual consideration, so that the exemption of section 210(2) TCGA 1992 is not due. She gave £39,000 at arm's length for the policy in May 2021 and paid premiums of £500 while she held the policy. She sold the policy at arm's length on 10 July 2021 and received £40,000. A Chargeable Event Gain £2,000 arises on which she is taxed under the Income Tax rules. (The Chargeable Event Gain is quantified by reference to the sale proceeds and the premiums paid under the policy by both the taxpayer and the previous owners of the policy, see CG69001). The 'normal' computation for Capital Gains Tax purposes (see CG69060) is
Disposal proceeds 40,000
Less excluded by section 37 TCGA 1992 (2,000) 38,000
Consideration given to acquire policy 39,000
Premiums paid by taxpayer 500 (39,500)
Loss (£1,500)
The comparative computation that TCGA92/S210 (8) requires, disregarding TCGA92/S37 and TCGA92/S39, is
Disposal proceeds 40,000
Consideration given to acquire policy 39,000
Premiums paid by taxpayer 500 (39,500)
Gain £500
As the result of the second computation is a gain, section 210(8) TCGA 1992 operates so that there is no loss on the disposal for Capital Gains Tax purposes. The legislation does not convert the loss into a chargeable gain - it simply restricts the amount of any loss for the purposes of Capital Gains Tax. There is no chargeable gain on which tax may be due from the disposal. And the restriction made to the loss has no bearing on the £40,000 cost of the policy to the person who bought the policy.
If the premiums paid by the taxpayer in the above example had been £1,500 instead of £500, the first computation (assuming the same £2,000 Chargeable Event Gain) would finish with a loss of £2500. But the second computation would then result in a loss of £500. On those figures section 210(8) TCGA 1992 restricts the loss for the purposes of Capital Gains Tax to the smaller figure of £500.