Gains on life policies, typically accrue over several years but are charged to income tax in the year of the relevant event, such as surrender or maturity. This can have the effect of pushing total income into a higher marginal rate. In the original legislation, TSR was designed to mitigate this charge by averaging the ‘chargeable event’ gain over the life of the policy.
One anomaly, which the Budget has addressed, was that the chargeable event gain could also push total income into the band in which the personal allowance was tapered. The tapered personal allowance will now be restored on gains realised after Budget Day.
To prevent excessive relief, however, the personal allowance, but not any other reliefs or allowances, must be offset as far as possible against other sources of income in priority to the event gain.
The second measure creates an exception to the general statutory rule that reliefs and allowances may be allocated to achieve the greatest reduction in an individual’s income tax liability, but this is balanced by the provision for restoring the personal allowance. As the Budget measures are effective immediately, there is no scope to plan a more advantageous time for surrendering a life assurance policy. Taken together, however, the improved consistency of the new rules for the calculation of gains is to be welcomed.
Read more on the Budget here.