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This example shows how the gains limit calculation operates in the simple case of a part assignment for consideration in the final year, which ends on the surrender of the policy. It also shows how the gain on a part assignment can be superseded by a later event bringing the policy to an end.

Transactions

Lucy and Steve took out a joint policy on 18 August 2010 with a premium of 拢60,000.

• On 5 June 2017 (in the 7th insurance year) Steve assigns his share to Lucy for cash of 拢50,000, the surrender value of the whole policy at that time being 拢100,000
• On 3 December 2017 Lucy surrenders the policy for 拢102,000.

Chargeable events

The final insurance year runs from 18 August 2016 to 3 December 2017 (see IPTM3505). It is the 7th insurance year. There is a relevant transaction in the final year, namely the part assignment for consideration, so a gains limit calculation needs to be performed.

Gains limit calculation: This is the calculation of the gain on the final surrender as if the transaction-related calculation rules did not apply. This gain would be 拢42,000, that is, surrender proceeds of 拢102,000 less premium of 拢60,000, so the gains limit is 拢42,000.

5 June 2017: The total transaction value at the date of part assignment is 拢50,000 as there have been no earlier relevant transactions in the final year. This exceeds the gains limit by 拢8,000 so the transaction value of the part assignment is restricted to the gains limit of 拢42,000.

The allowable element of the premium is 7 x 5% x 拢60,000 = 拢21,000, as the part assignment occurs in the 7th insurance year and there have been no previous part surrenders or part assignments. Then, the gain on the part assignment is 拢21,000, namely the restricted transaction value of 拢42,000 less the allowable element of 拢21,000, and this is taxable on Steve in tax year 2017-2018.

Assuming that the insurer was promptly informed of the part assignment, a chargeable event certificate reporting this event and gain must be sent to Steve by 2 March 2018, within 3 months of the end of the insurance year in which the event occurred.

Note that this will supersede the certificate reporting the gain on the part assignment which the insurer should have sent to Steve by 17 November 2017, that is, before it knew that the insurance year would be extended to 3 December 2017 by the final surrender. This gain would have been 拢29,000, that is, simply the value 拢50,000 less the allowable premium of 拢21,000.

If the gain exceeds whatever is half the basic rate limit in tax year 2017-2018 then a certificate should also be sent to HMRC by 5 July 2018 (within 3 months of the end of the tax year in which the chargeable event occurred).

3 December 2017: The gain on the surrender is 拢21,000, namely proceeds 拢102,000 less premium 拢60,000 less gain on part assignment 拢21,000. It is taxable on Lucy in 2017-2018.