Section 539 | Relief for deficiencies

(1)An individual is entitled to a tax reduction for a tax year in which a deficiency arises from a policy or contract on a chargeable event if—

(a)the condition in subsection (2) is met,

(b)the individual would (apart from this section) be liable to income tax at one or more relevant rates for the tax year, and

(c)the individual makes a claim.

(2)The condition is that, if a gain had arisen instead on the chargeable event—

(a)the individual would have been liable to income tax on the gain for the year, or

(b)the individual would have been so liable apart from the requirement in section 465(1) that the individual must be UK resident in the tax year in which the gain arises.

(3)The tax reduction is given effect at Step 6 of the calculation in section 23 of ITA 2007.

(4)See section 540 for the cases in which a deficiency is treated as arising from a policy or contract on a chargeable event, section 541 for how the deficiency is calculated and section 469(5) for the apportionment of deficiencies in cases where two or more persons are interested in a policy or contract.

(5)The amount of the tax reduction is calculated as follows.

Step 1Determine the amount of the individual’s income for the tax year that is liable at each relevant rate.

Step 2Attribute the amount or amounts determined at Step 1 to the deficiency, so far as possible.

Step 3Calculate the amount of the individual’s preliminary income tax liability for the tax year (see subsection (6)).

Step 4Calculate the amount of the individual’s preliminary income tax liability for the tax year again, on the assumption that each amount determined under Step 1, so far as attributed to the deficiency at Step 2, is liable at the appropriate lower rate.

Step 5Deduct the amount found at Step 4 from the amount found at Step 3. The result is the amount of the tax reduction.

(6)The individual's preliminary income tax liability is the amount found by calculating the individual's income tax liability in accordance with section 23 of ITA 2007, ignoring Steps 6 and 7 of that calculation.

(7)In this section—

(a)“relevant rate” means a rate mentioned in the first column of the Table;

(b)“the appropriate lower rate”, in relation to an amount of the individual’s income for the tax year that is liable at a relevant rate, means the rate mentioned in the second column of the Table in the same row as that relevant rate.

(8)Here is the Table referred to in subsection (7)—

(9)Where—

(a)it is possible to carry out Step 2 in subsection (5) by attributing amounts in more than one way, and

(b)the tax reductions, calculated under that subsection by carrying out that Step in those ways, are of different amounts,

Step 2 is to be carried out in the way that results in the highest tax reduction.