Deficiency relief: entitlement and calculation
There is no relief under the chargeable event regime in any circumstances for an investment loss sustained on a policy or contract. Neither can a loss on one policy be set against a gain on another.
A special relief called ‘deficiency relief’ may, however, be available to individuals only when a policy or contract comes to an end.
Entitlement to deficiency relief
An individual will be entitled to deficiency relief if
- the calculation of the gain, as described in IPTM3510, on the final chargeable event (death, maturity, full surrender, or taking a capital sum as a complete alternative to annuity payments), shows a negative amount: this will be the case if total benefits fall short of total deductions plus previous gains
- one or more gains arose on ‘excess events’ or ‘part surrender or assignment events’, see IPTM3555, in earlier tax years on which the individual was liable, and
- the individual is the liable person, that is, would have been liable to income tax on a gain on the final chargeable event, had the calculation shown a gain.
The amount of deficiency relief will be given by following the steps in the next paragraph.
Computation of deficiency relief
Step 1: Apply the gain calculation rule described in IPTM3510 to the final chargeable event. If the result is not negative no deficiency relief is available and steps 2 to 4 are not necessary.
Step 2: Record the amount of deficiency given by the gain calculation.
Step 3: Determine the total of gains on previous ‘excess events’ and ‘part surrender or assignment events’, which formed part of the total income of the same individual who is now benefiting from the relief.
Step 4: The amount of deficiency relief is then the lesser of the amounts given in steps 2 and 3. It follows that although the gains on ‘personal portfolio bond events’, see IPTM3670, are deducted in determining the amount on the final gain calculation, they do not count in establishing how much of that amount may be available as deficiency relief.
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