Deficiency relief: examples
- Rachel took out a policy on 5 October 2005 with a premium of £20,000
- On 27 September 2007 she withdrew £8,000 from the policy by a part surrender
- On 14 November 2009 she surrendered the policy for £13,000. She was UK resident throughout
- Her only taxable income (after personal allowances) in 2009-2010 is employment income of £40,700. The higher rate tax band for 2009-2010 starts at £37,400.
The first ‘insurance year’, see IPTM3505, runs from 5 October 2005 to 4 October 2006, the second from 5 October 2006 to 4 October 2007, and so on, until the ‘final insurance year’, which runs from 5 October 2008 to 14 November 2009.
- Year 2: The ‘periodic calculation’, see IPTM3660, at 4 October 2007 shows an excess of £6,000 (that is, £8,000 less £20,000 x 0.05 x 2).
So, the part surrender of £8,000 gave rise to an ‘excess event’ on 4 October 2007 and a gain of £6,000, which formed part of Rachel’s taxable income for 2007-2008.
Final year: The gain calculation on the surrender is TB - TD - PG.
- TB (total benefits) is £8,000 + £13,000 = £21,000.
- TD (total deductions) is simply premium paid of £20,000
- PG (previous gains) is £6,000, the gain on the earlier ‘excess event’.
The gain calculation is £21,000 - £20,000 - £6,000 = -£5,000. The amount of deficiency is £5,000, which is less than the amount of earlier excess gains.
Therefore, the amount of deficiency available for relief is £5,000, (the amount of the overall deficiency) which will be available against Rachel’s total taxable income in tax year 2009-2010, as follows.
The amount of Rachel’s taxable income falling in the higher rate tax band is £3,300, which is relieved by deficiency relief of £3,300 in the way described in IPTM3870. Effectively, the basic rate band is extended by £3,300 so that an additional £3,300 of Rachel’s employment is taxed at basic rate rather than higher rate.
The balance of the deficiency relief is £1,700 and this cannot be used in this tax year, or carried forward or back to other tax years.
- Facts as in example 1, except that the policy was surrendered for £10,000.
- Year 2: As before, there is an ‘excess event’ on 4 October 2007 and a gain of £6,000.
- Final year: TB is now £8,000 + £10,000 = £18,000. TD and PG are as before.
Gain calculation is £18,000 - (£20,000 + £6,000) = -£8,000. Because the premium paid exceeds the total benefits, the amount of deficiency available for relief is limited to the amount of the earlier chargeable event gains that is £6,000.
Further reference and feedback IPTM1013