IPTM6110 - Sickness disability and unemployment insurance: tax treatment from 6 April 1996: main rules: scope
From 6 April 1996 payments received from policies taken out to protect a person from sickness, disability or unemployment will generally be tax free where the premiums were paid out of taxed income.
The legislation exempts payments that would otherwise be taxable as annual payments - SAIM8000 onwards. It is also extended to cover payments from an employer’s group insurance scheme that would otherwise be taxed as employment income - see EIM06410.
Payments from non-UK policies, which are not a UK source of income, are treated in the same way as payments from UK policies. There are no special or additional conditions that must be met for the payments to qualify for the exemption.
The rules relating to payments received from policies taken out by individuals are set out below. Where payments are received from employers’ schemes, and other situations where someone else has paid part of the premiums for the policy, see IPTM6120.
Scope of the exemption: ITTOIA05/S735
Payments received from an insurance policy are exempt from tax if
- the insured person - see below - did not receive income tax relief for the premiums paid for the policy: this means UK income tax, so the exemption is still available if relief has been given outside the UK against foreign taxes
- the policy insures against a qualifying health or employment risk - IPTM6115
- the payments are made during the qualifying period - IPTM6115, and
- the policy is a genuine insurance policy issued on arm’s length terms - see below.
There is no limit on the amount of payments that can be received free of tax.
The insured person: ITTOIA05/S742
For ITTOIA05/S735 to ITTOIA05/S737 only, the insured person includes
- spouse or civil partner
- child (under 21)
- spouse’s child (under 21), and
- any person who is jointly liable for the expense that is insured, for example a joint borrower on a mortgage.
Without these extensions to the definition of insured person a payment from a policy because of the sickness disability or unemployment of one person would be taxable on another person to the extent that they benefited from the payment. This extension allows such payments to come within the exemption.
Genuine arm’s length insurance
There are rules aimed at preventing abuse of the exemption. For
- investments presented as insurance policies see IPTM6130
- single policies covering providing different types of benefits or policies linked to other policies see IPTM6135.
Further reference and feedback IPTM1013