Policyholders can receive part surrenders or part assignments up to an annual cumulative 5% allowance of the premium paid without incurring a tax charge. If the total value received from the policy exceeds the allowance, it is a chargeable event and a gain is brought into charge at the next anniversary date (‘end of the insurance year’).
For a part surrender, the value received is usually the cash withdrawn from the policy, while for part assignments, it is the surrender value (usually lower than the real value) of the part sold at the date of the sale. Gains arising from chargeable events are deductible from any gain that arises when the policy comes to an end.
The current rules can result in gains arising which are disproportionate to the policy’s underlying economic gain. In particular, this can arise if a policyholder makes a large part surrender (or part assignment) in the earlier years of the life insurance policy.
The government has announced it will make legislative changes with effect from 6 April 2017 which will allow applications to be made to HMRC to have these disproportionate charges recalculated on a just and reasonable basis leading to fairer outcomes for policyholders.
This change is to be welcomed and will provide more flexibility in circumstances where withdrawals are made from life policies.