IPTM1510 | Outline of the chargeable events regime: part surrenders and part assignments for consideration

The ‘5% deferral rule’, or ‘excess rule’, can be found at ITTOIA05/S507. It operates so that partial surrenders or assignments of broadly up to 5% of accumulated premiums can be made with any tax charge postponed until maturity or other later realisation.

The rule is commonly referred to within the industry as the ‘5% allowance’. Sometimes the process is loosely described as the ‘5% exemption’. It is not an ‘exemption’, but it may be in some cases that by the time the deferred charge is triggered, the circumstances of the person chargeable may have changed so that no tax is payable.

The operation of the rules is described in more detail in IPTM3540 onwards

Underlying arrangements in relation to a bond may be complex. A bond may comprise a collection of policies and the tax consequences flowing from withdrawals from it may be quite different depending on whether the withdrawal takes the form of a part surrender across a number of policies, or whether one or more policies from the collection are fully surrendered. Ultimately, it is the policyholder’s responsibility to understand the implications of making these choices.