IPTM3500 - Calculating gains: general

Helpsheet HS320 contains a summary of the calculation provisions with simple examples. Customers should find this adequate for many of their requirements or may rely upon the chargeable event certificates issued by insurers.

Three sets of rules may apply. The concepts are explained in simplified terms below. Details are given in the paragraphs referred to. ‘Insurance year’ is explained at IPTM3505.

Whole of the rights given up, details at IPTM3510

This rule covers full surrenders and assignments for value, death and maturity. The gain is equal to the excess of the total policy benefits received during the life of the policy over premiums paid, less any earlier policy gains. It applies as a final sweep-up, if there have been earlier chargeable part surrenders or assignments. Or as the sole calculation required otherwise.

A rule limiting the benefits applies where death is the chargeable event - see IPTM3515.

Part surrenders and part assignments - ‘periodic calculation’ rule, details at IPTM3560

This is the normal rule that deems an event to have occurred at the end of the insurance year, sometimes referred to as the ‘5 per cent rule’. The event is known as an ‘excess event’.

If there has been no previous chargeable event under the policy, the event gain is equal to:

• the excess of the total value of part surrenders or assignments so far, over
• an allowance at a cumulative 5 per cent annual rate on each premium paid so far, starting with the insurance year of payment and ending at the end of the insurance year of calculation, subject to a maximum of 20 years’ allowances.

An example of how the calculation works in practice can be found at IPTM7620.

‘Transaction-based calculation’ rule, details at IPTM3580

This rule applies where

• a calculation under the periodic rule shows a gain, but
• within the same insurance year there has been
  • a part assignment for value, or
  • a part surrender followed by an assignment not for value.

The rule is designed to ensure that the gain in cases of earlier assignment is charged on the correct person – the assignor – not the person otherwise liable as owner of the rights at the end of the insurance year. It applies whether or not the earlier assignment gave rise to a chargeable event gain.

Each such part surrender, or part assignment for value, is treated as a chargeable event in its own right, a ‘part surrender or assignment event’, taking place when it happens rather than at the end of the insurance year, although the gain is still charged by reference to that year. These part disposals are recognised in the order they take place, with a special rule in the final insurance year.