Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Insurance Policyholder Taxation Manual

From
HM Revenue & Customs
Updated
, see all updates

Full surrender: example of gain calculation

Transactions

  • policy taken out on 2 May 2000 with a premium of £10,000
  • a part surrender of £2,000 is made on 4 Oct 2000
  • the policy is substituted for a new related policy on 15 July 2002. The surrender value at the time is £11,000, which is all applied as premium in the new policy
  • a part surrender of £1,500 is made on 4 April 2004
  • the policy is fully surrendered on 10 Nov 2005 for £12,000.

Chargeable events - old policy

The insurance years - see IPTM3505 - are 2 May 2000 to 1 May2001 and 2 May 2001 to 15 July 2002.

1 May 2001: There is an excess event on 1 May 2001, the end of theinsurance year in which the part surrender of £2,000 occurred.

The gain on the excess event is £2,000 – (1 x 5% x £10,000) = £1,500. See IPTM7605 to IPTM7620.

15 July 2002: The substitution is a surrender of the old policy.

The chargeable event gain on the surrender is TB - TD - PG where

  • TB = £11,000 + £2,000 = £13,000 (total of the amount of the surrender value on the substitution and the amount of the earlier part surrender)
  • TD = £10,000 (premium paid)
  • PG = £1,500 (gain on the earlier part surrender)

So the gain on the substitution surrender is £1,500.

The insurance years are 15 July 2002 to 14 July 2003, 15 July 2003 to 14 July 2004 and15 July 2004 to 10 Nov 2005.

14 July 2004: There is an excess event on 14 July 2004, arising from thepart surrender of £1,500 on 4 April 2004. The amount of premium for the purposes ofcalculating the gain on the excess event is £11,000, namely the premium applied to thenew policy on the substitution. The premiums paid on the earlier related policy are notrelevant.

The gain on the excess event is then £1,500 – (2 x 5% x £11,000) = £400.

10 Nov 2005: The chargeable event gain on the surrender is TB – TD– PG where

  • TB = £12,000 + £1,500 + £11,000 + £2,000 = £26,500. It is the total of the amounts of surrender and part surrender proceeds from both this policy and the earlier related policy, including the surrender value on the substitution.
  • TD = £11,000 + £10,000 = £21,000. It is the sum of the premium applied to the new policy from the related policy and the original premium paid into the related policy.
  • PG = £400 + £1,500 = £1,900. It is the total of the gains on excess events on both this policy and the earlier related policy. However, it does not include the gain on the substitution surrender of the related policy (£1,500), which is not a calculation event.

The gain on the surrender is then £26,500 – £21,000 – £1,900 = £3,600.

Further reference and feedback IPTM1013