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 (ie top sliced) in the income tax computation. Usually the gain has a 20% deemed tax credit attached, which means that if the policyholder is a basic rate taxpayer they do not have any further tax to pay. For more on the tax credit and the reporting of life insurance gains, see the Life insurance policies guidance note. You should read that note before continuing as the commentary below assumes familiarity with the terms discussed in that 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 one year; the profit has actually