IPTM7640 - Transaction-related calculations: example: part assignment for consideration in final year followed by surrender (to show gains limit calculation)
This example shows how the gains limit calculation operates in the simple case of a part assignment for consideration in the final year, which ends on the surrender of the policy. It also shows how the gain on a part assignment can be superseded by a later event bringing the policy to an end.
Transactions
Lucy and Steve took out a joint policy on 18 August 2010 with a premium of £60,000.
- On 5 June 2017 (in the 7th insurance year) Steve assigns his share to Lucy for cash of £50,000, the surrender value of the whole policy at that time being £100,000
- On 3 December 2017 Lucy surrenders the policy for £102,000.
Chargeable events
The final insurance year runs from 18 August 2016 to 3 December 2017 (see IPTM3505). It is the 7th insurance year. There is a relevant transaction in the final year, namely the part assignment for consideration, so a gains limit calculation needs to be performed.
Gains limit calculation: This is the calculation of the gain on the final surrender as if the transaction-related calculation rules did not apply. This gain would be £42,000, that is, surrender proceeds of £102,000 less premium of £60,000, so the gains limit is £42,000.
5 June 2017: The total transaction value at the date of part assignment is £50,000 as there have been no earlier relevant transactions in the final year. This exceeds the gains limit by £8,000 so the transaction value of the part assignment is restricted to the gains limit of £42,000.
The allowable element of the premium is 7 x 5% x £60,000 = £21,000, as the part assignment occurs in the 7th insurance year and there have been no previous part surrenders or part assignments. Then, the gain on the part assignment is £21,000, namely the restricted transaction value of £42,000 less the allowable element of £21,000, and this is taxable on Steve in tax year 2017-2018.
Assuming that the insurer was promptly informed of the part assignment, a chargeable event certificate reporting this event and gain must be sent to Steve by 2 March 2018, within 3 months of the end of the insurance year in which the event occurred.
Note that this will supersede the certificate reporting the gain on the part assignment which the insurer should have sent to Steve by 17 November 2017, that is, before it knew that the insurance year would be extended to 3 December 2017 by the final surrender. This gain would have been £29,000, that is, simply the value £50,000 less the allowable premium of £21,000.
If the gain exceeds whatever is half the basic rate limit in tax year 2017-2018 then a certificate should also be sent to HMRC by 5 July 2018 (within 3 months of the end of the tax year in which the chargeable event occurred).
3 December 2017: The gain on the surrender is £21,000, namely proceeds £102,000 less premium £60,000 less gain on part assignment £21,000. It is taxable on Lucy in 2017-2018.