IPTM3870 | Deficiency relief: calculation of deficiency

The amount of deficiency available is determined by following the steps below.

Step 1: Calculate the gain arising on the event which brings the policy to an end, as described in IPTM7510. If the result is positive then no deficiency relief is available and steps 2 and 3 are not necessary. If the result is negative, record it without the minus sign. For example, if the result is “-£5,000”, record “£5,000”.

Step 2: Add together the gains on previous ‘excess events’ and ‘part surrender or assignment events’, which formed part of the total income of the same individual who is now benefitting from the relief. Annual personal portfolio bond gains are not to be included.

Step 3: The amount of deficiency is the lesser of the amounts given in steps 1 and 2.

Example 1

• Rachel took out a policy on 5 October 2015 with a premium of £20,000.

• On 27 September 2017 she withdrew £8,000 from the policy by way of a part surrender.

• On 14 November 2019 she surrendered the policy for £13,000.

• She was UK resident throughout.

• Her only taxable income (after personal allowances) in 2019/20 is employment income of £53,000. The higher rate tax band for 2019/20 starts at £50,000.

The first ‘insurance year’ (see IPTM3505) runs from 5 October 2015 to 4 October 2016, the second from 5 October 2016 to 4 October 2017, and so on, until the final insurance year, which runs from 5 October 2018 to 14 November 2019.

Year 2: The ‘periodic calculation’ (see IPTM3560) at 4 October 2017 shows an excess of £6,000 (that is, £8,000 less [£20,000 x 2/20]). So, the part surrender of £8,000 gave rise to an ‘excess event’ on 4 October 2017 and a gain of £6,000, which formed part of Rachel’s taxable income for 2017/18.

Final year: The gain calculation on the surrender is TB – TD – PG:

• TB (total benefits) is £8,000 + £13,000 = £21,000.

• TD (total deductions) is simply premium paid of £20,000.

• PG (previous gains) is £6,000, the gain on the earlier ‘excess event’.

The gain calculation is £21,000 – £20,000 – £6,000 = –£5,000. The amount of deficiency is £5,000, which is less than the amount of earlier excess gains.

Therefore, the amount of deficiency available is £5,000 which will be available against Rachel’s total taxable income in tax year 2019/20, as follows.

The amount of Rachel’s taxable income falling in the higher rate tax band is £3,000, which is relieved in the way described in IPTM3880. Effectively, £3,000 of Rachel’s employment is treated as taxed at basic rate rather than higher rate.

The balance of the deficiency is £2,000 and is lost. It cannot be:

• used in this tax year, or

• carried forward, or

• carried back to other tax years.

Example 2

Facts as in example 1, except that the policy was surrendered for £10,000.

Year 2: As before, there is an ‘excess event’ on 4 October 2017 and a gain of £6,000.

Final year: TB is now £8,000 + £10,000 = £18,000. TD and PG are as before (£20,000 and £6,000 respectively).

Gain calculation is £18,000 – (£20,000 + £6,000) = –£8,000.

The amount of deficiency available is limited to the amount of the earlier chargeable event gain; that is £6,000.

How deficiency relief is calculated is described in IPTM3880.