IPTM3505 - Calculating gains: ‘insurance year’

‘Insurance year’ – sometimes called policy year – begins on the day a policy is taken out and on the same date in subsequent years. It ends on the day before the anniversary of the start date and each subsequent year.

For example, a policy taken out on 1 June 2019 has an insurance year ending on 31 May 2020. A part surrender giving rise to an ‘excess event’ taking place on 1 April 2020 would appear to fall in tax year 2019-20. But the gain on the ‘excess event’ would be treated as arising at the end of the ‘insurance year’, on 31 May 2020, and consequently would be assessable for tax year 2020-21.

If an event brings a policy or contract to an end – full surrender of rights, death, maturity or taking a capital sum as a complete alternative to annuity payments – the insurance year is treated as ended on that date. It is then referred to as the ‘final insurance year’.

If that rule would result in an insurance year beginning and ending within the same tax year, then the final insurance year is extended to include the previous insurance year.

For example, if there is an insurance year running from 1 June 2019 to 31 May 2020 and the policy is fully surrendered on 30 June 2020, the final insurance year runs from 1 June 2019 to 30 June 2020 – in this case, the final insurance year is 1 year and 1 month long.

The extended period of a final insurance year, coupled with the requirement on the insurer to issue a chargeable event certificate broadly within three months of the event, may result in the issue of a certificate for an event that turns out not to be chargeable. This may happen where the event is swept up in a calculation for a terminal event that brings the final insurance year to an end - see IPTM3570. In this case the insurer should notify the policyholder that the earlier certificate should be disregarded - see IPTM7210.