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Introduction

The profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains), even though these profits are known as chargeable event gains. These chargeable event gains are taxed last after all other income in the income tax computation. Usually the chargeable event gain has a 20% deemed tax credit attached, which means that if the policy-holder is a basic rate taxpayer they will not have any further tax to pay. See the Life insurance policies and Life insurance policies ― top slicing relief guidance notes. It is recommended that you read these guidance notes first as the commentary below assumes familiarity with concepts discussed in those guidance notes.

However, what if a loss arises on the surrender of the policy instead of a gain? A loss arises where the individual receives less than the premiums paid over the lifetime of the policy or the gain on surrender is less than the chargeable event gains which were previously taxed. In this situation, the individual may be able to benefit