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 2004 has an ‘insurance year’ ending on 31 May 2005. A part surrender giving rise to an ‘excess event’ taking place on 1 April 2005 would fall in tax year 2004-05. But the gain on the ‘excess event’ would be treated as arising at the end of the ‘insurance year’, on 31 May 2005, and consequently would be assessable for tax year 2005-6.
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 2004 to 31 May 2005 and the policy is fully surrendered on 30 June 2005, the ‘final insurance year’ runs from 1 June 2004 to 30 June 2005.
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.
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