CG69080 | Payments made under life insurance policies linked to unit trusts

Life insurance companies may offer life policies in which the value of policy benefits is linked to the value of units in unit trusts. When payment is made under such policies, the company first deducts a notional Capital Gains Tax deduction so that the policy holder receives a net amount. What has happened is not usually apparent as the unit value is struck net of Capital Gains Tax. But a specific notional deduction for Capital Gains Tax is sometimes made, generally in the case of older policies written in the 1970s and early 1980s. The policy holder often questions the correctness of this action or claims a refund of the tax.

With a unit-linked policy, it is the insurance company which owns the investment in the units, not the policy holder. On the disposal of those units, the company is liable to Capital Gains Tax in the normal way. Only a net amount after accounting for tax on disposal of the units is available for the policy holder. Since the tax is the liability of the company and not of the policy holder, it cannot be refunded to the policy holder even if his/her annual exemption is unused or if the gain on the disposal is exempt.