IPTM7620 | Periodic calculations: example

From HM Revenue & Customs · Insurance Policyholder Taxation Manual

This example shows how excess events can arise on a policy where there has been more than one payment of premium and how unused net allowable payments are carried forward to later years.

Transactions

On 10 January 2011 a policy is taken out with an initial premium of £10,000
On 27 August 2012 a part surrender of £500 is made
On 5 February 2013, a further premium of £5,000 is paid
On 17 July 2015, a part surrender of £4,000 is made.
On 27 October 2017, a part surrender of £3,000 is made.

Periodic calculations and excess events

Each ongoing insurance year runs from 10 January to 9 January of the following year.

Year 2 (10 January 2012 to 9 January 2013):

The allowable element is 2 x 5% x £10,000 = £1,000.

Since the amount of the part surrender (£500) does not exceed the net allowable element, no excess event arises for this year.

Year 5 (10 January 2015 to 9 January 2016):

The total of allowable elements is (5 x 5% x £10,000) + (3 x 5% x £5,000) = £3,250, that is 5 years’ allowance relating to the initial premium and 3 years’ relating to the later premium. No allowable elements were previously taken into account, as there have been no previous excess events, so net total allowable payments is £3,250.

Net total value of parts surrendered is £500 + £4,000 = £4,500. This exceeds the net total allowable payments by £1,250 therefore an excess event arises at the end of the insurance year on 9 January 2016 and the amount of gain is £1,250.

Year 7 (10 January 2017 to 9 January 2018):

Total allowable elements is (7 x 5% x £10,000) + (5 x 5% x £5,000) = £4,750. Allowable elements of £3,250 were taken into account on the excess event in year 5 so net total allowable payments is £1,500.

Total value of parts surrendered is £500 + £4,000 + £3,000 = £7,500 but part surrender values totalling £4,500 were brought into account on the excess event in year 5 so must be deducted. Therefore, the net total value of parts surrendered is £3,000.

This exceeds net total allowable payments, so an excess event arises on 9 January 2018 and there is a chargeable event gain of £1,500.