IPTM7210 | Correction of certificates: termination of the policy changes the treatment of an earlier chargeable event

It is possible for the treatment of a chargeable event to be changed by a subsequent termination of the policy on surrender, maturity or death.

Extended time limit

Strictly, the insurer is required to issue a fresh certificate to the policyholder with the correct details within the normal time limit but in many cases this will already have passed. In these circumstances, the insurer is given until the end of the period allowed for reporting the gain to HMRC to report to the policyholder, namely until three months after the end of the tax year in which the event occurred.

Except in the case of late notification of death, the insurer will always know by the end of this period that a revised certificate is needed. Where an insurer has not been notified of a death by the end of this period, it need not issue a revised certificate for the earlier event. It must still issue a certificate reporting the gain on the death in the normal way.

This is best illustrated by some examples. The examples refer to ‘insurance year’ which is described in IPTM3505.

Example: earlier part assignment

Suppose the insurance year ends on 6 May 2020 and there has been a part assignment on 17 February 2020 giving rise to a gain. The insurer reports this part surrender or assignment event and the gain to the policyholder, an individual, before the time limit of 5 August 2020. The policy is surrendered on 17 November 2020 and the transaction values are such that the gain on the part assignment is recalculated under a gains limit calculation - there is an example in IPTM7640.

The insurer must report the revised gain on the part assignment by 5 July 2021, that is, three months from the end of the tax year in which the event occurred.

Example: part surrenders in the final year

Suppose that the insurance year ends on 24 May 2020 and there have been part surrenders in the year giving rise to an excess event on 24 May 2020. The insurer reports this event and gain to the policyholder before the time limit of 23 August 2020. The policy is then surrendered on 30 November 2020.

The final insurance year then becomes 25 May 2019 to 30 November 2020 and the calculation of the final gain on surrender takes in all the transactions over this period, superseding the excess event and gain that arose on 24 May 2020. Since this excess event is no longer a chargeable event, no revised certificate is required, although it may be helpful to policyholders if the insurer tells them that the certificate issued to them on the final event supersedes the earlier certificate.

Under no circumstances should the insurer attempt to correct the position by deducting the gain on the superseded excess event in the final gain calculation. This is wrong and might show deficiency relief where none is due.

It is less likely that a certificate has been issued to HMRC before the insurer becomes aware of the surrender of the policy. Assuming the policyholder is not a company, the time limit for reporting the excess gain to HMRC is 5 July 2021, that is, three months from the end of the tax year in which the event occurred. So, in most cases the insurer will already know that the excess event has been superseded before it has issued the certificate.