IPTM7635 - Transaction-related calculations: example: part surrenders followed by a gift part assignment followed by another part surrender in same year
This example illustrates the position where there are several transactions in the same insurance year. It shows how transaction-related calculations are carried out successively to determine whether a part surrender or assignment event has occurred and if so, what the gain is, who is taxable and who is due the chargeable event certificate. It also illustrates the operation of the reporting limit for providing certificates to HMRC.
Transactions
Anil takes out a policy on 10 June 2015 with a premium of £100,000.
- On 15 August 2019 he makes a part surrender of £20,000.
- On 13 November 2019 he makes another part surrender of £25,000.
- On 10 February 2020 he assigns the policy by way of gift into joint ownership by him and his wife Sunita.
- They make a part surrender of £10,000 on 6 April 2020.
Chargeable events
The insurance year runs from 10 June to 9 June the following year. The transactions all take place in the fifth insurance year. The total value of transactions during the year is £55,000. It exceeds the allowable element of the premium of £25,000 (5 x 5% x £100,000). As there has also been a part surrender in the year followed by an assignment by way of gift, transaction-related calculations need to be carried out to see if a part surrender or assignment event arises on each of the relevant transactions.
15 Aug 2019: Part surrender of £20,000 is less than the allowable element of £25,000 so no gain arises and there is no part surrender or assignment event. Remaining allowable element to carry forward is £5,000 (that is, £25,000 – £20,000).
13 November 2019: Part surrender of £25,000 exceeds remaining allowable element of £5,000 by £20,000. A part surrender or assignment event occurs on this date, and the gain of £20,000 is taxable on Anil in 2020-2021, the tax year in which the insurance year ends. Assuming that the insurer learns of the later assignment before the end of the insurance year, the insurer must send the certificate to Anil within 3 months of the end of the insurance year, by 9 September 2020. Assuming the gain exceeds half the basic rate limit for 2020-2021, the insurer must also send a certificate to HMRC by 9 September 2020.
10 February 2020: As the transaction is an assignment by way of gift, that is, not for money or money’s worth, no chargeable event arises.
6 April 2020: A gain of £10,000 arises on the part surrender of £10,000 since there is no allowable element carried forward from the previous part surrender. A part surrender or assignment event occurs on this date and the gain is taxable in equal shares on Anil and Sunita in tax year 2020-2021. Assuming they live at the same address, the insurer will satisfy its reporting duty by sending them a single certificate reporting the gain by 9 September 2020. But gains before and after the change of ownership are not connected – see IPTM7150 – so the insurer is not required to report this gain to HMRC, as it is less than half the basic rate limit.