IPTM3730 | Foreign policies: reduction for non-UK policyholder

From HM Revenue & Customs · Insurance Policyholder Taxation Manual

The rules on this page applied prior to 6 April 2013. IPTM3731 explains the changes to these rules from 6 April 2013.

The gain from a foreign policy of life insurance or foreign capital redemption policy is reduced if the policyholder was not UK resident throughout the policy period. This is often referred to as a ‘time apportioned reduction’.

Prior to 6 April 2013, the gain is reduced by an appropriate fraction, equal to A/B, where:

A is the number of days on which the policyholder was not UK resident in the policy period
B is the total number of days in the policy period.

Policy period means the number of days the policy has run before the chargeable event occurs.

If the gain is under a policy which is a ‘new policy’ under the substituted policy rules at ICTA88/SCH15/PARA17 - see IPTM8120 onwards, the policy period includes the old policy and any predecessor of that policy under a similar application of the rule.

The reduction does not apply to a policy held by

non-UK resident trustees unless it was held by them on 19 March 1985
a foreign institution unless it was held by it on 16 March 1998.

Foreign institution is defined at IPTM3260. Where a gain under such a policy is reported on a chargeable event certificate, the full gain will be shown on the policy. If an apportionment for periods of non-residence is due, the taxable person must calculate the apportioned gain and enter it on the tax return.

Example

Transactions

Michael takes out a life policy on 17 March 1997 from an insurer based in Jersey whilst working in Germany.
He returns to the UK on 20 April 2001 and is UK resident from that date.
He fully surrenders the policy on 5 October 2005, giving rise to a chargeable event gain of £10,750.

Tax treatment

The policy is a ‘foreign policy’ within the definition in IPTM3330 so an apportionment of the gain applies. There must also be a restriction in the number of years for top slicing relief – see IPTM3830. For further information on top slicing relief, see IPTM3820 onwards.
The policy ran for a total of 3,125 days, including the days on which it was made and surrendered. Michael was not resident in the UK for 1,495 days of this period.
Michael is due a reduction in the gain of £10,750 x (1,495/3,125) = £5,143. Thus he is liable on a gain of £5,607, which is the figure that should be entered on his tax return for the 2005-06 tax year.
Top slicing relief on gains made before 6 April 2013 is given by reference to a number ‘N’. N is the number of complete years from the issue of the policy less the number of complete years in which the policyholder was not resident in the UK. N is then used to calculate the top slicing relief. See IPTM3840.
The policy ran for 8 complete years. Michael was non-resident for 4 complete years so the number of years for top slicing relief to be entered on the tax return must be reduced to the 4 in which he was UK resident.