(1)An individual is entitled to a tax reduction for a tax year in which a deficiency arises from a policy or contract on a chargeable event if—
(a)the condition in subsection (2) is met,
(b)the individual would (apart from this section) be liable to income tax at the higher rate or the dividend upper rate (or both) for the tax year, and
(c)the individual makes a claim.
(2)The condition is that, if a gain had arisen instead on the chargeable event—
(a)the individual would have been liable to income tax on the gain for the year, or
(b)the individual would have been so liable apart from the requirement in section 465(1) that the individual must be UK resident in the tax year in which the gain arises.
(3)The tax reduction is given effect at Step 6 of the calculation in section 23 of ITA 2007.
(4)See section 540 for the cases in which a deficiency is treated as arising from a policy or contract on a chargeable event, section 541 for how the deficiency is calculated and section 469(5) for the apportionment of deficiencies in cases where two or more persons are interested in a policy or contract.
(5)The amount of the tax reduction is calculated as follows.
Step 1
Attribute to the amount of the deficiency an amount of the individual's income for the tax year which is liable at the dividend upper rate, so far as is possible.
Step 2
If there is an amount of the deficiency remaining after Step 1, attribute to the remaining amount of the deficiency an amount of the individual's savings income for the tax year which is liable at the higher rate, so far as is possible.
Step 3
If there is an amount of the deficiency remaining after Step 2, attribute to the remaining amount of the deficiency an amount of the individual's other income for the tax year which is liable at the higher rate, so far as is possible.
Step 4
Calculate the amount of the individual's preliminary income tax liability for the tax year (see subsection (6)).
Step 5
Calculate the amount of the individual's preliminary income tax liability for the tax year again, on these assumptions—
Assume that any income attributed to the deficiency at Step 1 is liable at the dividend ordinary rate.
Assume that any income attributed to the deficiency at Step 2 is liable at the savings rate.
Assume that any income attributed to the deficiency at Step 3 is liable at the basic rate.
Step 6
Deduct the amount found at Step 5 from the amount found at Step 4.
The result is the amount of the tax reduction.
(6)The individual's preliminary income tax liability is the amount found by calculating the individual's income tax liability in accordance with section 23 of ITA 2007, ignoring Steps 6 and 7 of that calculation.]
Textual Amendments
F1S. 539 substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 539 (with transitional provisions and savings in Sch. 2)
(1)A deficiency is treated as arising from a policy or contract on a chargeable event (“the later event”) if conditions A to C are met.
(2)Condition A is that the later event is an event within section 484(1)(a)(i) or (iii) or (b) to (e) (surrender of all rights, final participation in profits, death, maturity, or taking a capital sum as a complete alternative to annuity payments).
(3)Condition B is that a gain from the policy or contract has arisen on a calculation event other than a personal portfolio bond event, occurring in relation to the policy or contract in question before the later event.
(4)Condition C is that on the later event no gain is shown by the calculation in section 491(2) (calculation of gains for such events).
(1)This section sets out how the amount of a deficiency treated as arising under section 540(1) on a chargeable event (“the later event”) is calculated.
(2)If, when the calculation in section 491(2) is made for the later event, the total allowable deductions equal or exceed the total benefit value, the amount of the deficiency is equal to the total previous gains.
(3)If, when that calculation is made, the total benefit value exceeds the total allowable deductions, the amount of the deficiency is equal to the total previous gains, less that excess.
(4)In this section “the total previous gains” means the total amount of gains that—
(a)were treated as arising on calculation events (other than personal portfolio bond events) occurring in relation to the policy or contract in question before the later event, and
(b)formed part of the total income of the individual mentioned in section 539(1) for a tax year earlier than the tax year mentioned in that section.