Transaction-related calculations: example: several relevant transactions in the final year
This example shows how the gains limit is applied successively to relevant transactionsduring the final year.
Miguel and Saira took out a joint policy on 15 June 2000 for a single premium of£60,000. Annual part surrenders of £3,500 are taken on 21 August each year. Theremaining transactions are
- On 2 April 2008 Miguel assigns his share to Saira for cash of £55,000, equivalent to half the surrender value at that date
- On 15 September 2008 Saira makes a part surrender of £10,000
- On 10 January 2009 Saira surrenders the policy for £91,000.
The final insurance year is 15 June 2007 to 10 January 2009. The annual part surrendersof £3,500 exceed the annual allowable element of £3,000, that is, (5% x £60,000) sothere are gains of £500 on excess events for each of the seven years before the finalinsurance year, taxable half each on Miguel and Saira. There are relevant transactions inthe final insurance year so a gains limit calculation is necessary and the events andgains in the final year are as follows:
Gains limit calculation: The gains limit is £69,000 calculated as
(9 x £3,500 + £10,000 + £91,000) £60,000 (7 x £500)
being total payments from the policy less premiums less total of excess event gains fromearlier years.
21 August 2007: Gain on part surrender of £3,500 is £500 (that is,£3,500 less allowable element of 5% x £60,000). It is unaffected by the gains limit asthe transaction value is below the gains limit. This is taxable half each on Miguel andSaira in 2008-2009.
2 April 2008: Total transaction value in year to date is £58,500 (thatis, £55,000 + £3,500) which is still less than the gains limit so the calculation isagain unaffected by the gains limit. The gain on the part assignment is £55,000, taxableon Miguel in 2008-09.
21 August 2008: Total transaction value to date is 62,000 (that is,58,500 + 3,500), which is still less than the gains limit so the gain is simply £3,500,taxable on Saira in 2008-2009.
15 September 2008: Total transaction value to date is 72,000 (that is,62,000 + 10,000), so the transaction value is limited to 7,000, namely the gains limitminus the previous transaction values (£69,000 £3,500 £55,000 £3,500). The gain is £7,000, taxable on Saira in 2008- 2009.
10 January 2009: Total proceeds from the policy are £132,500 (that is,£91,000 + £31,500 + £10,000), total of gains on all excess events and part surrender orassignment events is £69,500 (that is, £3,500 + £500 + £55,000 + £3,500 + £7,000)and premium paid is £60,000. The £69,500 includes the gains of £3,500, that is 7 x£500, made during the first 7 years of the policy. Therefore, the gain on the fullsurrender is £3,000, taxable on Saira in 2008-2009.
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