UK tax can be quite complex to follow and understand, especially when tax residence and domicile are involved. One such scenario in the UK is the Tax Implications on UK Life Insurance Policies, for Non-UK Residents and UK Residents. There might be a tax to pay on the gains you realise on your life insurance policy. In the UK, life insurance providers are required to issue a certificate if there’s been a gain on a UK life insurance policy. You should receive this certificate reporting the gain directly from the provider or indirectly through trustees or a lender.
In some cases, you may not receive the certificate, for instance, having a qualifying policy, assigning the policy as a gift, or receiving benefits that didn’t lead to a gain on a UK life insurance policy. Moreover, the certificate could have been sent to someone who isn’t liable for tax, sent to the wrong address, or where the insurer may not be aware of the event causing the gain. In that case, you are required to contact the provider to inform them of the event and ask for the chargeable event certificate.
Tax Treatment of the Maturing Insurance Policy
The gain on a life insurance policy is treated as income for the tax year in the event of a sale or surrender of the life insurance policy, death or when the policy matures.
If your insurance policy is close to maturing, it triggers a chargeable event unless it is excluded in certain cases. This chargeable event falls under the purview of sections 461, 473, and 484 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). In this article, all references to tax law will be under ITTOIA unless otherwise stated.Â
The tax liability stemming from this event depends on the individual’s residence status at the time of realisation and is governed by specific conditions outlined in section 465.Â
Example Scenario (Considering Gain on Life Insurance Policy for Non-UK Resident)
For instance, let us assume you’ve been a non-UK resident for three consecutive years (2015-16, 2016-17, 2017-18) and have a UK policy maturing for £290,000 on 5 April 2024 with premiums paid of £100,000; then the tax treatment requires careful examination. It’s not just for the insurance policy; you also need to understand other tax responsibilities if you leave the UK for work or to live abroad.
The calculation of a gain resulting from the maturing policy is relatively straightforward for UK residents. It involves deducting allowable expenses, typically the premiums paid into the policy, from the amount received. In this instance, you gain £190,000 (£290,000 – £100,000) before further adjustments are considered. However, in this scenario, you have non-UK residency periods (including the overseas part of the split year, s528) during the policy’s terms, and the gain must be adjusted further by accounting for the number of days in the non-UK residency period to the total days the policy has been active.Â
By applying the reduction formula tailored to non-UK residency, we receive a recalibrated gain of £126,609, subject to income tax under the applicable rates. It’s crucial to note that while basic rate tax is treated as paid against this gain, the mechanics of tax relief and refundability under relevant tax provisions play a significant role.
Adjusting the Gain for Non-Residency = £190,000 x 1,096 / 3,285 = £63,391
Adjustment for Non-Residency:
- The formula provided adjusts the gain for the proportion of the policy term that the individual was a non-UK resident.
- The number
1,096represents the total days the individual was non-UK resident during the policy’s term. - The number
3,285is the total number of days the policy has been held.
£190,000 less £63,391 will leave £126,609 to be subject to income tax in the calculation. The split year has still not been reviewed, but it should be. Income tax at 20% basic rate tax will be treated as paid against the income gain. This cannot be refunded under s530 but is relieved against the income tax liability for that tax year.
Top Slicing Relief – Are You Eligible?
You may fall into a higher tax rate as the chargeable gain is taxable in the realised tax year even if you pay the lower tax rate on a regular basis, of course, without including the gain. You can also avail yourself of the top slicing relief.
You are eligible for the Top Slicing Relief only when you:
- Fall under the basic rate taxpayer, excluding the gain, and pay the basic tax on your other income. However, when the gain is added to your other income, you fall into a higher tax rate or additional tax rate threshold.
- You are already paying the higher rate tax on your other income, excluding the gain; however, you have to pay the additional rate tax if the gain is added to your other income.Â
To calculate the amount of relief you can claim, you need to know about the total number of complete years mentioned on the chargeable event certificate. However, in the case of non-residency, you are required to reduce the number of years; therefore, in the example above, the policy would be six years instead of nine as per s536(7).
The personal allowance is completely eliminated because the income exceeds £125,140 (as per s35 of the Income Tax Act 2007). When computing top slicing relief, you reintroduce the personal allowance for calculation purposes, although it remains disallowed in the overall income tax calculation as outlined in s535.
ConclusionÂ
Understanding the tax implications of a maturing personal life insurance policy, especially as a non-UK resident, is crucial. It involves careful consideration of your residency status, allowable expenses, and applicable tax rates. Seek professional advice from expert personal tax accountants to stay compliant while reducing tax liabilities.Â
