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HMRC internal manual

Insurance Policyholder Taxation Manual

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HM Revenue & Customs
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Policies and contracts owned by companies: application of the loan relationships rules: transition from chargeable events rules: deemed surrender

Deemed surrender of insurance contract immediately before start date A company that is already a party to an investment life insurance contract on the start date (see

IPTM3900) is treated for the purposes of the chargeable event gain rules as having surrendered all the rights under it immediately before that date for an amount equal to the carrying value of the contract.

The carrying value of the contract immediately before that date is the amount recognised in the company’s accounts for the last accounting period before the loan relationships rules apply, that is, the first to end on or after 1 April 2008. In many cases, a company is likely to be accounting for an investment life insurance contract at historic cost, which will be the premiums paid under the policy or contract, so there will not be a gain on the deemed surrender.

Where the company accounts for an insurance contract other than at historic cost, for instance at fair value, there may be a chargeable event gain on the deemed surrender. In general, the surrender value of the policy should be a good approximation to the carrying value under fair value accounting.

Treatment of chargeable event gain on deemed surrender Where a chargeable event gain arises on the deemed surrender it is not charged to tax immediately. Instead, it is taxable as a non-trading credit under the loan relationships legislation in a future accounting period when the company disposes of all or part of rights under the insurance contract through surrender, assignment, maturity or death.

If all of the rights under the insurance contract are disposed of then the company must bring the whole of the gain into account as a non-trading credit for the accounting period in which the disposal occurs. If only part of the rights are disposed of then only the proportion of the gain relating to the rights disposed of are brought into account.

There is no tax treated as paid on a non-trading credit relating to a gain on the deemed surrender.

ExampleThe company’s accounting period is to 30 June each year and the company owns an investment life insurance contract at the start date of 1 July 2008. It accounts for the contract at fair value and the carrying value of the policy at 30 June 2008 is such that there is a gain of £12,500 on the deemed surrender of the rights under the contract on that date.

The company part surrenders 30% of the rights under the contract on 15 October 2008 and surrenders the balance on 27 July 2009.

AP ended 30 June 2009: The company must bring 30% of the gain on the deemed surrender - £3,750 - into account as a non-trading credit for this AP.

AP ended 30 June 2010: The balance of the gain on the deemed surrender - £8,750 – must be brought in as a non-trading credit for this AP.

Non-trading credits may also arise in each of these APs on the part surrender and full surrender under the normal loan relationships rules, depending on the value of the contract on the dates of the surrenders and the previous accounting dates.

Further reference and feedback IPTM1013