Guidance

HS321 Gains on foreign life insurance policies (2024)

Updated 6 April 2024

This helpsheet deals with chargeable event gains arising from foreign life insurance policies. It covers the most common circumstances that you’re likely to come across when dealing with the taxation of gains on foreign life insurance policies. These notes are generally applicable to individuals, trustees and personal representatives of a deceased person unless the notes say otherwise.

Chargeable event gains can also arise on purchased life annuities as well as capital redemption policies. If you believe you have one of these two types of policy (or your circumstances are more complex) you can find more detailed guidance in the Insurance Policyholder Taxation Manual.

In these notes ‘gains’ are chargeable event gains. They’re taxable as income rather than capital gains, so capital losses and the annual exempt amount cannot be set against them. Normally gains on foreign life insurance policies, unlike gains on UK policies, do not attract a non-repayable basic rate tax credit.

Ask your insurer if you’re in doubt:

• about what sort of policy you have
• whether there’s been a chargeable event gain
• whether tax is treated as paid

1. Types of policy

This section will help you decide if you have a gain because you received a payment or other benefit. The type of policy you have and the type and amount of any payment or benefit you received are all things that may affect whether you have to pay any Income Tax.

The Trust and Estate Foreign Notes provide similar guidance for trustees and personal representatives. This helpsheet also provides supplementary information for foreign trusts.

2. If the policy is a foreign policy

A foreign policy is usually one issued by an insurer from outside the UK. If you’re in any doubt as to whether your policy is of this type ask your insurer.

3. The kind of policy you have

Not all payments from your insurer are taxable. For tax purposes, the most important distinction is between ‘non-qualifying’ and ‘qualifying’ policies, although most foreign policies are non-qualifying policies. As such, this helpsheet focuses mainly on non-qualifying policies. Non-qualifying policies will normally give rise to a gain, but a number of factors can affect whether you have to pay any tax or not.

A single premium life insurance policy is one where you pay an amount to the insurer (a premium) at the beginning of the policy. You may also be able to pay additional premiums. This type of policy can never be a qualifying policy and is most likely to give rise to a taxable gain.

4. Acquired or second-hand policies

If you’re not the original owner of a policy, and you received money in connection with such a policy, or given the policy away or exchanged it for another asset, read information on what will give rise to a gain.

5. Personal portfolio bonds

Personal portfolio bonds give rise to an annual charge. They are broadly policies that allow selection of the property by which the policy is valued unless the only property that can be selected is:

• property appropriated by the insurer to an internal linked fund
• units in an authorised unit trust
• shares in an approved investment trust, or an overseas equivalent
• shares in an open-ended investment company
• certain cash deposits
• certain life policies
• interests in certain collective investment schemes
• shares in a UK Real Estate Investment Trust or an overseas equivalent
• an interest in an authorised contractual scheme

Most policies will not be personal portfolio bonds. Your insurer will be able to tell you if your policy is one or not.

6. Life annuities

If you think you may have a purchased life annuity (sometimes referred to as a ‘life annuity’) or a capital redemption policy, read the Insurance Policyholder Taxation Manual.

7. If a gain arises

7.1 What will give rise to a gain

The most common circumstances in which a gain arises are if during the year:

• cash or other benefits were received on a full or part surrender of a policy
• a policy matured or was brought to an end by the death of the life insured
• there was a sale or assignment of a policy (or part of a policy) for value
• the policy was a personal portfolio bond (even if the insurer had not paid cash or other benefits during the year)

If the calculations which are required following these events show that a gain has arisen your insurer should send you a chargeable event certificate showing the gain.

7.2 Other circumstances in which you may make a taxable gain

You may also make a taxable gain in the following circumstances if:

• your insurer makes you a loan
• you’re issued with a replacement policy
• you make a change to your policy

Your insurer may have told you about the effect of the above. If they have not, ask them for details.

8. Notification of gains

Under arrangements made with HMRC, if your foreign insurance company knows (as they usually will) that something has happened to give rise to a chargeable event gain, including an annual gain under a personal portfolio bond, they may have sent you a certificate showing the amount of the gain that you’ve made or the amount of benefits paid. If you’ve received a certificate from your insurer then, unless more than one person made the gain or you’re entitled to a time apportioned reduction, this is the amount you should enter on your tax return.

If in doubt, ask your insurer to tell you what sort of policy or annuity you have and whether there’s been a chargeable event and a gain.

8.1 How to report a gain

The gain should be reported. How to do this depends on your circumstances.

1. If you are already within Self Assessment you should report the gain in your Self Assessment return.

2. If you are not within Self Assessment but the gain (together with your other savings and investment income) exceeds £10,000, you should register for Self Assessment and report the gain in your Self Assessment return. See the following guidance on how to register.

When reporting the gain in your return, use supplementary pages SA106. Include the details of the gain under ‘Other overseas income and gains’.

3. If you are not within Self Assessment and the gain (together with your other savings and investment income) does not exceed £10,000, you should report it by either:

• contacting Self Assessment: general enquiries
• sending a copy of the chargeable event certificate to Self Assessment, HM Revenue and Customs, BX9 1AS. Make sure to include your National Insurance number

9. When will a gain not arise on a non-qualifying policy

You will not have made a gain if the:

• calculations show that there’s no gain
• event is the transfer of beneficial ownership of the whole or part of a policy to a spouse or civil partner who you’re living with at some time in the tax year in which the transfer took place
• beneficial ownership was transferred as security for a debt
• beneficial ownership was transferred for no money or money’s worth (this includes gift assignments)

If you’ve received a benefit or, one of these circumstances has occurred, and none of these bullet points apply, you’ve probably made a gain. If this describes your situation, see the section on calculating a gain.

10. Withdrawals up to 5%

You may also have made a gain which is only taxable when your policy ends. This is because in each insurance year you can withdraw up to 5% of the premium paid into your policy without a gain happening in that year. An insurance year begins on the anniversary of the date of your policy was taken out and ends on the day before the anniversary in the next year (except in the final insurance year). The 5% takes into account regular pay outs or withdrawals.

If, for example, you do not make any withdrawals in an insurance year, the full amount of the 5% ‘annual allowance’ is carried forward. This means that in the second insurance year, if you have not made a withdrawal in the first insurance year, you can withdraw up to 10% of the premium paid without a gain happening in that second insurance year.

The 5% annual limit is not a tax-free amount. All amounts paid from or withdrawn from a policy have to be added into the calculation made when your policy ends.

11. Other circumstances where there is no gain

Policies made before 20 March 1968 (and not changed after) will not give rise to gains. If your policy was made before that date but was changed after it, the policy may be treated as made after that date.

Other circumstances include gains on critical illness or disability, certain policies made before June 1982 and gains made upon death. You can find more information in the Insurance Policyholder Taxation Manual.

12. No chargeable event certificate received — but a gain has been made

If you have not received a certificate, in most cases this will be because you did not make a gain. This could be because the amount of benefit received did not give rise to a gain or, for example, you assigned your policy as a gift.

However, if any of the following circumstances apply, a gain may have arisen even though the person chargeable may not have received a certificate from their insurer.

The insurer may have sent the certificate to someone who is not liable for any tax due, for example, where the policy is held by:

• the trustees of a:
  • trust you set up or contributed property
  • bare trust of which you are a beneficiary
• anybody holding a policy in their own name as your nominee
• a lender to whom your policy was previously assigned as security for a debt of yours

If you believe this may have happened, you should check with the trustees, nominee or lender to find out whether the insurer has sent them a certificate and if so, ask them for a copy.

The insurer has sent the certificate to the wrong address because, for example, the policyholder has changed address without telling their insurer. If this may have happened, you should contact the insurer to ask whether they issued a certificate to your old address and, if so, to request a copy.

The insurer may not know about the event giving rise to the gain. For example, a policy may be sold but neither buyer nor seller have advised the insurer that the life insured under the policy has died. If this has happened, you should contact the insurer to inform them of the event that has happened and you should also ask them for a chargeable event certificate.

13. Gains arising to individuals

A gain will be treated as part of your income if you’re the:

• ‘beneficial’ owner of the rights under the policy — you’re likely to be the beneficial owner if you paid the premiums and you (or your estate after your death) are entitled to any benefits under the policy — you may be regarded as the beneficial owner in other circumstances, usually because you’re absolutely entitled to benefit from a policy — for example, you may be the beneficiary of a bare trust
• owner of rights under a policy which is held as security for a debt of yours, such as a mortgage
• person who either created or added property to a trust that holds the policy — the gain is treated as your income whether or not you’re entitled to benefit under the terms of the trust, unless the trust is a bare trust or a resulting trust and you are entitled to recover from the trustees any tax that you pay on the gain

14. Benefits from overseas trusts and entities

A chargeable event gain on a foreign life insurance policy is also treated as income for this purpose if the rights under the policy or life annuity are held:

• by a non-resident trust and the person who created the trust is not charged UK tax on the gain
• as security for a debt owed by a non-resident trust
• by an overseas entity
• as security for a debt owed by an overseas entity

For more information see the notes about helping you fill in the foreign pages of your tax return and Helpsheet 262 — Income and benefits from transfers of assets abroad and income from non-resident trusts. You can also find more information in the Insurance Policyholder Taxation Manual.

15. Calculating a gain

There are different rules for calculating a gain on:

• a full surrender or maturity
• death
• a sale or assignment
• a part surrender giving rise to a partial withdrawal of benefits or a payment of a cash bonus or an insurer making a loan or on the sale of part of a policy
• a part assignment other than by way of a gift

A gain is likely to be shown on the certificate provided by the insurer. This will not be the case if you sell or assign your policy other than by way of gift where the value received will usually be the sale price or value of assets received.

Guidance in the Insurance Policyholder Taxation Manual at IPTM3500 onwards explains how gains are calculated.

If you paid more than £100,000 a year into the policy or policies and you received a rebate of commission or you reinvested commission in the policy as additional premium, see guidance Insurance Policyholder Taxation Manual at IPTM3527 and Insurance Policyholder Taxation Manual at IPTM3528 on how to calculate the gain.

If, following a part surrender (or part assignment) of a policy, the persons liable to tax on the gain consider that the gain arising is wholly disproportionate they can apply to HMRC to have the gain recalculated on a just and reasonable basis. Wholly disproportionate gains tend to arise early in the life of a policy often because policyholders have taken cash from their policy that is far in excess of their 5% tax deferred allowance. You can find more information on who can apply and the application process in the Insurance Policyholder Taxation Manual.

16. The year a gain is taxable

In some cases, the insurer may have sent you more than one certificate relating to a particular gain, with the later certificate showing a revised figure of benefits paid or amount of chargeable gain. In this case, you should enter the details shown on that later certificate.

16.1 End of policy

If the event is a death or the maturity, sale or surrender of the whole of a policy, the gain is treated as income of the tax year in which the particular event occurs.

16.2 Part surrender or sale

If the event is the sale or surrender of part of a policy, including the making of a loan, it is the date on which the policy was taken out that determines the tax year in which any gain is taxed. The gain is taxed in the tax year in which the end of the insurance year falls.

16.3 Example — how to work out the correct year

A policy you took out on 1 July 1998 would have an insurance year ending on each 30 June following until your policy finally ends. If using this example, you made a part surrender on 31 January 2023, the end of the insurance year would be 30 June 2023. 30 June 2023 falls into the 2023 to 2024 tax year so you would enter the gain on this year’s tax return.

17. Dividing gains — joint owners

A policy is treated as if it’s in co-ownership if:

• more than one individual is beneficially entitled to the benefits payable under the policy
• the rights under the policy are held on trusts created by more than one person (including where property was added to an existing trust)
• the rights under the policy are held as security for a debt owed by more than one person
• the rights under the policy are held in more than one capacity (for example, part of the rights are held as beneficial owner and part as trustee)

18. Proportion of rights

If you have a share in the rights under a policy, your share of any gain that arises is the same as your share of the rights. Joint owners are treated as having equal shares. If you own the policy jointly with your spouse or civil partner, you should each enter on your own tax return half the amount of the gain you’ve calculated or that is reported on any certificate showing a gain that you receive. You should also only enter half of any tax treated as payable. It is not possible to elect to share any ‘gain’ on a policy of life insurance.

19. Reliefs

19.1 Time apportioned reductions

The amount of your gain is reduced if you (or, if you were not the policyholder when the gain arose and the policy was issued before 6 April 2013, the policyholder) were not resident in the UK for any part of the period since the policy was taken out.

There are different rules for calculating the apportionment. If the policy was issued before 6 April 2013, then the reduction in the gain will be calculated by reference to the residence history of the policyholder.

The Insurance Policyholder Taxation Manual has more information about time-apportioned reductions.

20. Top-slicing relief

This is a relief that is generally available when you do not pay:

• higher rate tax on your other income (excluding the gain) but when the gain is added to your other income you have to pay higher rate tax
• additional rate tax on your other income (excluding the gain) but when the gain is added to your other income you have to pay additional rate tax

For more information about the calculation of Top-slicing Relief, see the Insurance Policyholder Taxation Manual.

21. Loss, or no gain, on the policy

The result of the calculation when a chargeable event arises may not be a positive amount. There’s no relief for a loss and you should not make any entries on your tax return. However, if the result of a full surrender, death or maturity calculation is negative and you made gains on the policy in earlier years, the section that follows about ‘deficiency relief’ may be relevant. A loss on one policy cannot be set off against a gain on another policy.

22. Deficiency relief

If the event is death, full surrender or maturity of the policy and the calculation includes any amount for gains made on earlier events, the result of the calculation of the gain may be a negative amount. If so, you may be entitled to a relief known as ‘deficiency relief’ which reduces the amount of Income Tax due on other income liable to higher rate tax. This relief is not available to trustees, personal representatives and beneficiaries of an overseas trust, company or other entity.

The Insurance Policyholder Taxation Manual has details about how to calculate the relief.

23. Get more information

For more information about online forms, phone numbers and addresses contact Self Assessment: general enquires.