RDRM33540 - Remittance Basis: Identifying Remittances: Specific Topics: Chargeable Event gains
The Insurance Policyholder Taxation Manual deals with the chargeable event gain regime which applies to gains from:
- policies of life insurance,
- contracts for life annuities,
- capital redemption policies.
Gains arising on a chargeable event, for example, the surrender of all rights under a policy of life insurance are chargeable to tax on the arising basis regardless of whether the policyholder is domiciled in the UK or not. The remittance basis does not apply.
Under a special rule (ITTOIA05/s507) policyholders are able to make partial surrenders or assignments of broadly up to 5% of accumulated premiums, with any tax charge postponed until maturity or other later realisation. This is known as the ‘5% deferral rule’ or the ‘excess rule’. When the policy comes to an end any earlier withdrawals are taken into account in calculating the end gain.
However, when considering the position of a remittance basis user, you will need to consider what income or gains they used to pay the premium due under the contract or policy. Where an individual purchases an overseas life insurance, or other income-generating, policy and subsequently part of that policy is surrendered for a cash payment and that money is brought to the UK; such payments will be treated as taxable remittances to the extent that the purchase of the original premium was made with the individual’s untaxed foreign income and gains that would have been taxed on the remittance basis if remitted to the UK.
So if the premium was paid using the individual’s foreign income or foreign gains that were untaxed when they arose, because the individual was a remittance basis user in that year, then any of the 5% withdrawal will be a taxable remittance if the money is brought to, or received or used in, the UK. The amount attributable to the ‘5% withdrawal’ indirectly derives from the original premium paid, so Conditions A and B of s809L apply. Refer to RDRM33020 Meaning of remittance.
Withdrawals in excess of 5% or full surrenders
If the individual withdraws more than 5% of accumulated premiums then, the amount in excess of 5% or the actual gain if a full surrender, will be chargeable to income tax under the chargeable event legislation. It is charged on the arising basis whether it is remitted or not.
Please refer to the Insurance Policyholder Taxation Manual for more details about the chargeable events regime.