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HMRC internal manual

Insurance Policyholder Taxation Manual

The charge to tax: income tax

The income tax charge is imposed by ITTOIA05/S461, and the ‘chargeable event regime’ is within Chapter 9 of Part 4 of ITTOIA05. The interaction with capital gains tax and other possible income tax charges is explained by IPTM1560. Income tax at the basic rate is in many cases treated as having been paid, see IPTM3800 and IPTM3810.

In the case of an individual, chargeable event gains are included in total income. Income tax may apply at the starting rate for savings and the basic, higher and additional rates, depending on the amount of the gain and the amount of any other income.

Where income tax at the basic rate is treated as paid, gains are generally treated as forming the highest slice of total income and often attract tax only on the difference between basic and higher (or additional) rates. The tax treated as paid is not repayable in any circumstances.

As gains are included in total income, they may affect entitlement to personal allowances, age-related allowances, and tax credits. Top-slicing relief - IPTM3820 - may affect the calculation of any higher or additional rate tax, but does not enter into the calculation of personal and age-related allowances or tax credits. Nor does deficiency relief, with one minor exception, see IPTM3870.

Gains on a chargeable event are included in determining capital gains tax rates, see CG21000 onwards.

Time gains arise

If a gain arises on the occurrence of a chargeable event, it is assessable for the tax year in which the ‘insurance year’, see IPTM3505, ends. Some events, excluding full assignments but including death, full surrender or maturity of the policy, bring the ‘insurance year’ to an end. Special rules apply to partial withdrawals and assignments, see IPTM3540 and IPTM3570.