IPTM1510 - Outline of the chargeable events regime: part surrenders and part assignments for consideration

A special rule, found at ITTOIA05/S507, is of great practical significance. It is known as the ‘5 per cent deferral rule’, or ‘excess rule’, and operates so that partial surrenders or assignments of broadly up to 5 per cent of accumulated premiums can be made with any tax charge postponed until maturity or other later realisation. Sometimes the process is loosely referred to in the industry as the ‘5 per cent exemption’. It is not an ‘exemption’ save to the extent that by the time the deferred charge is triggered, the circumstances of the person chargeable may have changed so that no tax is payable.

The operation of the rules can, from the policyholder’s, or chargeable person’s, standpoint seem capricious. This is particularly so if withdrawals from the policy are made that do not correspond with the underlying growth in value or if, for example, the value of the bond falls due to adverse stock market conditions. CT&VAT (Technical) Insurance Group will, if necessary, explain the operation of the rules to customers with such queries and HMRC Area offices should not attempt to do so.

Underlying arrangements in relation to a bond may be complex. It may comprise a collection of policies and the tax consequences flowing from withdrawals from the bond may be quite different depending on whether the withdrawal takes the form of part surrender of policies across the range, or whether one or more policies among a collection are wholly surrendered. Ultimately, it is the policyholder’s responsibility to understand the implications of making these choices, but the matter may be complex.