When an insurance contract matures it creates a chargeable event providing it’s not excluded. The chargeable event is liable as savings income. ITTOIA05 S 461, S473 and S484.
The individual is liable for the income tax if it arises when they are UK resident, and one of 3 conditions are met under ITTOIA05 S465.
The gain is generally calculated on the amount received less allowable deductions, usually the premiums paid into the policy, therefore your client will have a gain of £190K (£290K less £100K) before considering any other adjustments. ITTOIA05 S491.
If an individual has been non-UK resident for part of the term when they have beneficial owner under the policy, then you need to reduce the gain by finding the number of foreign days/the total days the policy has been in held in the period. The number of foreign days those where the individual has been non-UK resident for tax purposes, and this also includes the overseas part of the split year. ITTOIA05 S528
£190K x 1,096/3,285 =£63,391
£190K less £63,391 will leave £126,609 to be subject to income tax in the calculation.
*Any split year has not been taken into account, but this is something you may want to review.
Income tax at 20% basic rate tax is treated as paid against the income gain. This is relieved against the income tax liability for the tax year but cannot be refunded. ITTOIA05 S530.
The chargeable gain is taxable in the tax year it is realised which will make some taxpayers fall into the higher or additional rate when under ordinary circumstances they would pay the lower rate of tax without inclusion of the gain. Top slicing relief is available alleviate this to reflect the gain has accruing over the number of years the policy has been held and is taxed all in one year. It is only available to individuals.
However, you will need to reduce the number of years if there has been a period of non-residence, so in these circumstances the annual equivalent will be 6 rather than 9 for the period the policy has been held. ITTOIA05 S536(7).
The full personal allowance will be removed as the income is above £125,140, ITA07 S35. When calculating the top slicing relief you restore the personal allowance for the purpose of the calculation, but it is still denied on the general income tax calculation. ITTOIA05 S535.
You can find further information at our Croner-i guidance 343-410 HMRC reference manuals, IPTM3820 and IPTM3732
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