IPTM6140 | Sickness disability and unemployment insurance: lump sums to give up future rights to payments

Sometimes an insurer will offer a person a lump sum to give up all future rights to payments from the policy.

Lump sums will be chargeable to tax in the hands of the recipient where they are made up of accumulated benefits that are annual payments and which do not qualify for exemption.

They will be taxable as business income if the receipt is a trade receipt for the recipient – see BIM40750.

Alternatively they may be taxable as employment or pension income – see EIM00670 and EIM75400.

Most lump sums however will be capital, and not chargeable to income tax as savings or investment income or capital gains tax, whether or not the benefits were exempt – see CG69040 onwards.

Lump sums may be payable by instalments, which would not change their character. However, if the total of the instalments is greater than the lump sum payable, it is likely that the excess represents interest and so may be subject to income tax.

For lump sum compensation payments or out of court settlements see SAIM2070.