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The following examples assume a UK life policy that is an investment life insurance contract - see (IPTM3900) - forming part of the insurer鈥檚 BLAGAB business so the rules giving relief for tax treated as paid apply - see (IPTM3920).

Contract accounted for on historic cost basis

Company with normal accounting date 31 December took out a policy on 10 March 2014 with a premium of 拢10,000. It surrenders 25% of the policy on 5 February 2019 for 拢4,000.

There is a non-trading credit on the disposal: proceeds 拢4,000 less cost 拢2,500 (25% x 拢10,000) = 拢1,500. This must be grossed up by 拢1,500 x 20%/(100 鈥� 20%) = 拢375 and a non-trading credit of 拢1,875 must be brought into account in the company鈥檚 CT computation for the AP to 31 December 2019. Tax treated as paid of 拢375 is available for set-off against the company鈥檚 liability to CT for this AP.

Contract accounted for on fair value basis

This example shows how tax treated as paid is calculated for a contract accounted for at fair value where there is a part surrender.

Company with accounting date 30 June takes out a policy on 15 July 2016 with premium of 拢20,000 and this is also the initial fair value (FV). The FV of the policy at 30 June 2017 is 拢22,000 and at 30 June 2018 it is 拢21,500.

The company surrenders 50% of the rights under the contract policy on 5 October 2018 for 拢12,000, and the FV immediately before the part surrender is 拢24,000. FV at 30 June 2019 of the rights under the contract retained by the company is 拢12,750.

AP ended 30 June 2017: There is a non-trading credit of 拢2,000 (拢22,000 鈥� 拢20,000, the increase in value of the policy over the AP). No tax is treated as paid as no related transactions have occurred during the year.

AP ended 30 June 2018: There is a non-trading debit of 拢500 (拢21,500 鈥� 拢22,000).

AP ended 30 June 2019: There is a non-trading credit on the part disposal on 5 October 2018 of 拢1,250 (before the increase for tax treated as paid), calculated as proceeds 拢12,000 less the proportion of the FV of the contract at the previous AP end-date relating to the part disposed of (50% x 拢21,500).

This is a related transaction so tax is treated as paid. C (the amount payable on the disposal) is 拢12,000 and FVC (the fair value immediately before the part surrender) is 拢24,000, so the proportion C/FVC is 50%.

PC is then 拢2,000, namely 拢12,000 less 50% x 拢20,000, which is the FV of the contract when it was made (which is after 1 July 2008, the start of the company鈥檚 first AP to begin on or after 1 April 2008).

The amount by which the non-trading credit is increased is then PC 拢2,000 x 20%/(100 鈥� 20%) = 拢500, and this is also the amount of tax treated as paid. So, the non-trading credit relating to the part disposal is 拢1,250 + 拢500 = 拢1,750.

There is also an annual non-trading credit relating to the movement in value over the AP of the part of contract retained: FV at 30 June 2019 (拢12,750) less 50% x FV at 30 June 2018 (拢10,750) = 拢2,000.

In summary: There are non-trading credits totalling 拢3,750 (拢1,750 + 拢2,000) for the AP ended 30 June 2019 and tax treated as paid of 拢500, which is available for set-off against the company鈥檚 liability to CT for that AP.