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The amount of deficiency available is determined by following the steps below.

Step 1: Calculate the gain arising on the event which brings the policy to an end, as described in IPTM7510. If the result is positive then no deficiency relief is available and steps 2 and 3 are not necessary.聽If the result is negative, record it without the minus sign. For example, if the result is 鈥�-拢5,000鈥�, record 鈥溌�5,000鈥�.

Step 2: Add together the gains on previous 鈥榚xcess events鈥� and 鈥榩art surrender or assignment events鈥�, which formed part of the total income of the same individual who is now benefitting from the relief. Annual personal portfolio bond gains are not to be included.

Step 3: The amount of deficiency is the lesser of the amounts given in steps 1 and 2.

Example 1

• Rachel took out a policy on 5 October 2015 with a premium of 拢20,000.
• On 27 September 2017 she withdrew 拢8,000 from the policy by way of a part surrender.
• On 14 November 2019 she surrendered the policy for 拢13,000.
• She was UK resident throughout.
• Her only taxable income (after personal allowances) in 2019/20 is employment income of 拢53,000. The higher rate tax band for 2019/20 starts at 拢50,000.

The first 鈥榠nsurance year鈥� (see聽IPTM3505) runs from 5 October 2015 to 4 October 2016, the second from 5 October 2016 to 4 October 2017, and so on, until the final insurance year, which runs from 5 October 2018 to 14 November 2019.

Year 2: The 鈥榩eriodic calculation鈥� (see聽IPTM3560) at 4 October 2017 shows an excess of 拢6,000 (that is, 拢8,000 less [拢20,000 x 2/20]). So, the part surrender of 拢8,000 gave rise to an 鈥榚xcess event鈥� on 4 October 2017 and a gain of 拢6,000, which formed part of Rachel鈥檚 taxable income for 2017/18.

Final year: The gain calculation on the surrender is TB 鈥� TD 鈥� PG:

• TB (total benefits) is 拢8,000 + 拢13,000 = 拢21,000.
• TD (total deductions) is simply premium paid of 拢20,000.
• PG (previous gains) is 拢6,000, the gain on the earlier 鈥榚xcess event鈥�.

The gain calculation is 拢21,000 鈥� 拢20,000 鈥� 拢6,000 = 鈥撀�5,000. The amount of deficiency is 拢5,000, which is less than the amount of earlier excess gains.

Therefore, the amount of deficiency available is 拢5,000 which will be available against Rachel鈥檚 total taxable income in tax year 2019/20, as follows.

The amount of Rachel鈥檚 taxable income falling in the higher rate tax band is 拢3,000, which is relieved in the way described in IPTM3880. Effectively, 拢3,000 of Rachel鈥檚 employment is treated as taxed at basic rate rather than higher rate.

The balance of the deficiency is 拢2,000 and is lost. It cannot be:

• used in this tax year, or
• carried forward, or
• carried back to other tax years.

Example 2

Facts as in example 1, except that the policy was surrendered for 拢10,000.

Year 2: As before, there is an 鈥榚xcess event鈥� on 4 October 2017 and a gain of 拢6,000.

Final year: TB is now 拢8,000 + 拢10,000 = 拢18,000. TD and PG are as before (拢20,000 and 拢6,000 respectively).

Gain calculation is 拢18,000 鈥� (拢20,000 + 拢6,000) = 鈥撀�8,000.

The amount of deficiency available is limited to the amount of the earlier chargeable event gain; that is 拢6,000.

How deficiency relief is calculated is described in IPTM3880.