IPTM3810 - Income tax treated as paid

The general rule is that an individual or trustee who is liable for tax under the chargeable event regime is treated as having paid tax at the basic rate on the amount of the gain. Where this rule applies, the notional tax is not treated as repayable in any circumstances, but basic rate tax is still treated as paid if some or all of the gain is liable to income tax at the starting rate for savings and the personal savings allowance nil rate.

Tax at basic rate is not treated as having been paid on gains chargeable under the chargeable event regime on the following, and the general rule does not apply to:

• policies of life insurance and capital redemption policies that are ‘foreign policies’ - see IPTM3330 - unless issued by a UK branch of a foreign insurer
• policies issued as part of friendly society tax exempt life or endowment business
• life annuity contracts made:

- after 26 March 1974, and

- before 1 January 1992, or

- on or after 1 January 1992 by an overseas resident insurer not as part of UK branch business.

The result is that basic rate tax is only treated as paid when the insurer is taxed on the investment return accruing for the benefit of the policyholders under the so-called ‘I minus E’ system (see the Life Assurance Manual for more detail on ‘I minus E’).