When a life insurance policy is cashed in the profit from that policy (known as a chargeable events gain) is taxed in one year but will have built up over a number of years.
This can result in the profits being taxed at a higher tax rate and the taxpayer losing their personal allowance as their total income for that year exceeds £125,000.
Top slicing relief should adjust the tax due to the amount that would have been payable had the profit been paid in equal slices over the life of the policy, instead of all in one year. However, the HMRC computer does not reinstate the lost personal allowance when calculating the tax on each year’s slice of the profit.
The law will be changed to put beyond doubt that the personal allowance should be reinstated, as decided by a recent tax tribunal. However, this clarification to the law will only take effect for life insurance policies cashed in on and after 11 March 2020.
If you have paid tax on a large life insurance gain since 2010 you may have grounds to submit an overpayment relief claim to HMRC. We can help you calculate how much tax may have been overpaid.
