IPTM3880 - Deficiency relief: examples

Example 1

  • Rachel took out a policy on 5 October 2015 with a premium of £20,000
  • On 27 September 2017 she withdrew £8,000 from the policy by a part surrender
  • On 14 November 2019 she surrendered the policy for £13,000. She was UK resident throughout
  • Her only taxable income (after personal allowances) in 2019/20 is employment income of £53,000. The higher rate tax band for 2019/20 starts at £50,000.

Tax treatment

The first ‘insurance year’ - see IPTM3505 - runs from 5 October 2015 to 4 October 2016, the second from 5 October 2016 to 4 October 2017, and so on, until the final insurance year, which runs from 5 October 2018 to 14 November 2019.

  • Year 2: The ‘periodic calculation’, see IPTM3560, at 4 October 2017 shows an excess of £6,000 (that is, £8,000 less £20,000 x 2/20). So, the part surrender of £8,000 gave rise to an ‘excess event’ on 4 October 2017 and a gain of £6,000, which formed part of Rachel’s taxable income for 2017/18.

  • Final year: The gain calculation on the surrender is TB - TD - PG.

- TB (total benefits) is £8,000 + £13,000 = £21,000.

- TD (total deductions) is simply premium paid of £20,000

- PG (previous gains) is £6,000, the gain on the earlier ‘excess event’.

The gain calculation is £21,000 – £20,000 – £6,000 = –£5,000. The amount of deficiency is £5,000, which is less than the amount of earlier excess gains.

Therefore, the amount of deficiency available for relief is £5,000 (the amount of the overall deficiency) which will be available against Rachel’s total taxable income in tax year 2019/20, as follows.

The amount of Rachel’s taxable income falling in the higher rate tax band is £3,000, which is relieved by deficiency relief of £3,000 in the way described in IPTM3870. Effectively, the basic rate band is extended by £3,000 so that an additional £3,000 of Rachel’s employment is taxed at basic rate rather than higher rate.

The balance of the deficiency relief is £2,000 and is lost. It cannot:

  • be used in this tax year, or
  • carried forward, or
  • carried back to other tax years.
Example 2
  • Facts as in example 1, except that the policy was surrendered for £10,000.
Tax treatment
  • Year 2: As before, there is an ‘excess event’ on 4 October 2017 and a gain of £6,000.

  • Final year: TB is now £8,000 + £10,000 = £18,000. TD and PG are as before.

    Gain calculation is £18,000 – (£20,000 + £6,000) = –£8,000. Because the premium paid exceeds the total benefits, the amount of deficiency available for relief is limited to the amount of the earlier chargeable event gain; that is £6,000