The tax treatment of chargeable event gains on life assurance policies can cause difficulty. In a Tax Basics feature in Taxation Magazine, I explained the differences between qualifying and non-qualifying policies and the circumstances in which a chargeable event gain is likely to arise. The full article can be found in Taxation’s 27 May edition but a very brief summary is presented here.

Gains may arise on various policies including UK life assurance policies but not all polices give rise to taxable gains. Where a policy gain is taxable there are a number of different events that may give rise to a gain e.g. payment at maturity of the policy, a partial surrender or for example a withdrawal in excess of 5% annual cumulative allowance.

Broadly, the gain on such an event is the difference between the amount received from the life company and the initial premium paid less any withdrawals that have been made.

Where a gain arises, even though it is referred to as a chargeable event gain, it is subject to income tax not capital gains tax. The gain is brought into charge after ‘top slicing’ relief has been applied which effectively means the gain is spread back over the number of years since the policy started or, the last chargeable event date. This slice is then added to income to discover the amount of tax payable and if only basic rate liability arises no further tax is due. If higher rate tax is due a basic rate credit of 20% of the gain is allowed against the liability.

The calculations can be complex and are explored in the article as are some of the planning areas that should be considered to defer higher rate tax liabilities or to retain the benefit of other reliefs for example tax credits.