IPTM2077 | Restricted relief qualifying policy: example

A qualifying policy is issued on 1 January 2000. It is therefore a protected policy (IPTM2072) as it was issued before 21 March 2012. Its annual premiums payable are £4,000.

No other qualifying policies are held.

The policy is due to mature on 31 December 2024.

On 1 January 2014 the policy is varied and the amount of premiums payable per annum is increased to £5,000. As this is a variation after 21 March 2012 of a qualifying policy issued before 21 March 2012 and premiums are over the annual limit the protected policy now becomes a restricted relief qualifying policy (RRQP).

Total premiums payable are (£4,000 x 14) and (£5,000 x 11) = £111,000.

The policy matures on 31 December 2024 giving rise to a gain of £100,000.

Relief in full would be available for £4,000 per annum from 1 January 2000 to 31 December 2013 (£4,000 x 14 = £56,000).

Relief between 1 January 2014 and 31 December 2024 would be restricted to £3,600 per annum (£3,600 x 11 = £39,600).

The gain chargeable to tax on the maturity of that policy is reduced using the statutory formula:

Gain x Total amount of allowable premiums payable / Total amount of premiums payable

This formula applies in respect of the policy on which the chargeable gain arises and not the total premiums payable for all policies in existence.

In this case the calculation would be:
£100,000 x (£56,000 + £39,600) / £111,000 = £86,126

The taxable gain is:
Gain less reduction = revised gain

£100,000 - (£86,126) = £13,874