IPTM7645 - Transaction-related calculations: example: several relevant transactions in the final year

This example shows how the gains limit is applied successively to relevant transactions during the final year.

Transactions

Miguel and Saira took out a joint policy on 15 June 2010 for a single premium of £60,000. Annual part surrenders of £3,500 are taken on 21 August each year. The remaining transactions are:

  • On 2 April 2018 Miguel assigns his share to Saira for cash of £55,000, equivalent to half the surrender value at that date
  • On 15 September 2018 Saira makes a part surrender of £10,000
  • On 10 January 2019 Saira surrenders the policy for £91,000.

Chargeable events

The final insurance year is 15 June 2017 to 10 January 2019. The annual part surrenders of £3,500 exceed the annual allowable element of £3,000 (5% x £60,000) so there are gains of £500 on excess events for each of the seven years before the final insurance year, taxable half each on Miguel and Saira. There are relevant transactions in the final insurance year so a gains limit calculation is necessary and the events and gains in the final year are as follows:

Gains limit calculation: The gains limit is £69,000 calculated as

(9 x £3,500 + £10,000 + £91,000) – £60,000 – (7 x £500)

being total payments from the policy less premiums less total of excess event gains from earlier years.

21 August 2017: Gain on part surrender of £3,500 is £500 (that is, £3,500 less allowable element of 5% x £60,000). It is unaffected by the gains limit as the transaction value is below the gains limit. This is taxable half each on Miguel and Saira in 2018-2019.

2 April 2018: Total transaction value in year to date is £58,500 (that is, £55,000 + £3,500) which is still less than the gains limit so the calculation is again unaffected by the gains limit. The gain on the part assignment is £55,000, taxable on Miguel in 2018-2019.

21 August 2018: Total transaction value to date is 62,000 (that is, 58,500 + 3,500), which is still less than the gains limit so the gain is simply £3,500, taxable on Saira in 2018-2019.

15 September 2018: Total transaction value to date is 72,000 (that is, 62,000 + 10,000), so the transaction value is limited to 7,000, namely the gains limit minus the previous transaction values (£69,000 – £3,500 – £55,000 – £3,500). The gain is £7,000, taxable on Saira in 2018-2019.

10 January 2019: Total proceeds from the policy are £132,500 (that is, £91,000 + £31,500 + £10,000), total of gains on all excess events and part surrender or assignment events is £69,500 (that is, £3,500 + £500 + £55,000 + £3,500 + £7,000) and premium paid is £60,000. The £69,500 includes the gains of £3,500, that is 7 x £500, made during the first 7 years of the policy. Therefore, the gain on the full surrender is £3,000, taxable on Saira in 2018-2019.