Transaction-related calculations: example: part assignment for consideration in final year followed by surrender (to show gains limit calculation)
This example shows how the gains limit calculation operates in the simple case of apart assignment for consideration in the final year, which ends on the surrender of thepolicy. It also shows how the gain on a part assignment can be superseded by a later eventbringing the policy to an end.
Lucy and Steve took out a joint policy on 18 August 2000 with a premium of £60,000.
- On 5 June 2007 Steve assigns his share to Lucy for cash of £50,000, the surrender value at that time being £100,000
- On 3 December 2007 Lucy surrenders the policy for £102,000.
The final insurance year runs from 18 August 2006 to 3 December 2007. It is the 7thinsurance year. There is a relevant transaction in the final year, namely the partassignment for consideration, so a gains limit calculation needs to be performed.
Gains limit calculation: This is the calculation of the gain on the finalsurrender as if the transaction-related calculation rules did not apply. This gain wouldbe £42,000, that is, surrender proceeds of £102,000 less premium of £60,000, so thegains limit is £42,000.
5 June 2007: The total transaction value at the date of part assignmentis £50,000 as there have been no earlier relevant transactions in the final year. Thisexceeds the gains limit by £8,000 so the transaction value of the part assignment isrestricted to the gains limit of £42,000.
The allowable element of the premium is 7 x 5% x £60,000 = £21,000, as the partassignment occurs in the 7th insurance year and there have been no previous partsurrenders or part assignments. Then, the gain on the part assignment is £21,000, namelythe restricted transaction value of £42,000 less the allowable element of £21,000, andthis is taxable on Steve in tax year 2007-2008.
Assuming that the insurer was promptly informed of the part assignment, a chargeable eventcertificate reporting this event and gain must be sent to Steve by 2 March 2008, that iswithin three months of the end of the insurance year in which the event occurred.
Note that this will supersede the certificate reporting the gain on the part assignmentwhich the insurer should have sent to Steve by 17 November 2007, that is, before it knewthat the insurance year would be extended to 3 December 2007 by the final surrender. Thisgain would have been £29,000, that is, simply the value £50,000 less the allowablepremium of £21,000.
If the gain exceeds whatever is half the basic rate limit in tax year 2007-2008 then acertificate should also be sent to HMRC by 5 July 2008.
3 December 2007: The gain on the surrender is £21,000, namely proceeds£102,000 less premium £60,000 less gain on part assignment £21,000. It is taxable onLucy in 2007-2008.
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