The profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains) and taxed last after all other income ('top sliced', see below)in the income tax computation. The gain has a 20% deemed tax credit attached,which means that if the policy-holder is a basic rate taxpayer he will not have any further tax to pay. For more on the tax credit, see the Life insurance policies guidance note.

Different rules may apply to foreign policies and these are covered in the Offshore bonds and other foreign policies guidance note. That guidance note also explains how to find out if your client has a foreign policy.

However, there is an inherent unfairness in treating the life insurance gain as income in the year of surrender; the profit has actually accrued over the lifetime of the policy but due to these provisions is subject to tax all in one year. This can be advantageous if the taxpayer is able to ensure his other income is low enough to allow all the life insurance gain to be taxed at the basic rate (see below). It is a disadvantage where the gain takes the taxpayer into the higher rate or additional rate of tax.

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