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HMRC internal manual

Insurance Policyholder Taxation Manual

Income tax treated as paid

The general rule is that an individual or trustee who is liable for tax under the chargeable event regime is treated as having paid tax at the basic rate on the amount of the gain. Where this rule applies, the notional tax is not treated as repayable in any circumstances but basic rate tax is still treated as paid if some or all of the gain is liable to income tax at the starting rate for savings.

However, where the amount of gain on which an individual is charged is reduced by any reliefs or allowances, including personal allowances, then the amount of the gain on which the individual is treated as having paid tax is correspondingly reduced. The reliefs and allowances concerned are those included in steps 2 or 3 of the calculation in section 23 of Income Tax Act 2007.

Additionally, tax at basic rate is not treated as having been paid on gains chargeable under the chargeable event regime on the following, and the general rule does not apply to

  • policies of life insurance and capital redemption policies that are ‘foreign policies’, see IPTM3330, unless issued by a UK branch of a foreign insurer 
  • policies issued as part of friendly society tax exempt life or endowment business, see IPTM1105 
  • life annuity contracts made

    • after 26 March 1974, and
    • before 1 January 1992, or
    • on or after 1 January 1992 by an overseas resident insurer not as part of UK branch business, being one whose business does not attract corporation tax on ‘basic life insurance and general annuity business’, known as BLAGAB.

The date of issue is significant as older policies are not within the definition even if issued by a foreign insurer.

The result is that basic rate tax is only treated as paid when the insurer is taxed on the investment return accruing for the benefit of the policyholders under the so-called ‘I minus E’ system. Some countries within the European Economic Area employ similar systems.

ICTA88 uses the phrase ‘new non-resident policy’ defined as one issued after 17 November 1983 by a non-UK resident company.

Further reference and feedback IPTM1013