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.
Anil takes out a policy on 10 June 2000 with a premium of £100,000.
- On 15 August 2004 he makes a part surrender of £20,000.
- On 13 November 2004 he makes another part surrender of £25,000.
- On 10 February 2005 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 2005.
The transactions all take place in the fifth insurance year. The total value of transactions during the year is £55,000. This exceeds the allowable element of the premium of £25,000, that is, (5 × 5% × £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 August 2004: The part surrender of £20,000 is less than the allowable element of £25,000 so no gain arises and there is no part surrender. The remaining allowable element to carry forward is £5000, that is, (£25,000 − £20,000).
13 November 2004: The part surrender of £25,000 exceeds remaining allowable element of £5000 by £20,000. A part surrender event occurs on this date, and the gain of £20,000 is chargeable to tax on Anil in 2005-2006, 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 chargeable event certificate to Anil by 9 September 2005. Because the gain exceeds half the basic rate limit for 2005-2006, the insurer must also send a chargeable event certificate to HMRC by 9 September 2005.
10 February 2005: The transaction is an assignment by way of gift, that is, not for money or money’s worth, and so no chargeable event arises.
6 April 2005: 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 event occurs on this date and the gain is chargeable to tax in equal shares on Anil and Sunita in the tax year 2005-2006. Assuming Anil and Sunita live at the same address, the insurer will satisfy its reporting duty by sending them a single chargeable event certificate reporting the gain by 9 September 2005. However, gains arising 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.
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