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Life Insurance Policies – Deficiency relief to be available at the new 50% and 42.5% rate of tax

Deficiency relief is available to an individual whose non-qualifying life insurance policy, life annuity policy or capital redemption policy comes to an end producing a negative result in its tax calculation for the purpose of the chargeable events legislation and previous chargeable events triggered a chargeable gain.

To compensate the policyholder for tax paid on previous chargeable events, a tax reduction is currently available, on making a claim.

The calculation currently works by applying the deficiency first to dividends HMRC has expanded the number of rates at which deficiency relief will be available to include the new additional and dividend additional rates of tax applicable as from 6 April 2010.

taxable at the upper rate, then to income taxable at the 40% higher rate of tax, and deducting from those amounts the same amounts at the ordinary dividend and basic rate of tax respectively.

From 6 April 2010 the new priority list will be first against dividends charged at the new 42.5% rate, secondly against income charged at the new 50% additional rate, thirdly dividends charged at the 32.5%, and finally against the 40% higher rate. From this will be deducted 10% for the dividend tax credit and 20% for other income respectively.

Clearly for policyholders who previously suffered tax on their chargeable events and will be subject to the 50% additional rate, this could be a particularly attractive result because of tax relief at a higher rate than the rate at which tax was paid on the interim chargeable event.

Provisions will be inserted to prevent abuse, so that the additional rates will not be available for relief if the chargeable event triggering the deficiency was made pursuant to arrangements made on or after 22 April 2009, the main purpose of which was to secure a tax advantage. In such a case relief will still only be available at the upper and higher rates.

The anti-avoidance provision will not apply if the earlier chargeable event gains arose in respect of an “excess events” (the point where amounts withdrawn from an investment bond exceeded the cumulative 5% allowed) or in respect of a part surrender or assignment which occurred more than 5 years before the date of the chargeable event that triggered the deficiency.

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