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Draft Finance Bill 2017: Life insurance policies: part surrenders and part assignments

Life insurance policies

Policyholders will be able to apply to HMRC for the gain arising to be calculated on a just and reasonable basis.


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Who should read this? 

Life assurance policyholders and their agents and advisers

Summary of proposal 

The draft Finance Bill contains clauses to introduce a process which will allow policyholders to apply to HMRC to recalculate the gain on a partial surrender or part assignment on a just and reasonable basis when the normal rules would otherwise produce a wholly disproportionate gain.

Key Changes since previous proposals

Current legislation sets out the rules to follow when calculating the taxable gain on a part surrender or part assignment of a life assurance policy in excess of the usual 5% allowance. As demonstrated in Lobler (Joost) v Revenue and Customs Comrs [2013] the application of these mechanical rules can result in a substantial taxable gain completely disproportionate to the economic gain.

HMRC consulted on three alternative calculation methods but have decided to adopt a more informal process, as suggested by respondents, by which a policyholder can apply for a gain to be recalculated by HMRC on a just and reasonable basis when the normal rules generate a wholly disproportionate gain. The application for a just and reasonable calculation will have to be made within two years of the end of the insurance year in which the gain arose (or such longer period as may be allowed).


These changes will take effect from 6 April 2017.

Our view 

A solution to the problem of disproportionate gains arising in certain circumstances is welcome and, as only a very low number of cases are affected, this informal approach is probably the most practical.   However given the informal nature of the proposals, affected policyholders will need to be made aware of the possibility of making an application for a recalculation and the need to do so before deadlines pass, especially for submitting any tax returns or other information to HMRC (for example under Making Tax Digital). 

We also look forward to constructive guidance from HMRC on how this procedure will be applied in practice.


Daniel Crowther

+44 (0) 122 358 2163

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