(1)A deficiency from a policy or contract arising on a chargeable event is allowable as a deduction from an individual’s total income for a tax year if, had a gain arisen instead on that event—
(a)the individual would have been liable to income tax on the gain for that 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.
(2)See section 540 for the cases in which such a deficiency is treated as arising, 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.
(3)Subsection (1) only applies for the purpose of determining the individual’s extra liability.
(4)For this purpose, an individual’s extra liability is the amount by which the individual’s liability to income tax exceeds the amount it would be on the assumptions specified in subsections (5) and (6).
(5)It is assumed that income charged to tax at the higher rate is charged—
(a)in the case of income within section 1A(1A)(c) of ICTA (income charged at the lower rate instead of the basic rate), at the lower rate, and
(b)in any other case, at the basic rate.
(6)It is assumed that income charged to tax at the dividend upper rate is charged at the dividend ordinary rate.
(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.