Frequently asked questions

Fifteen years ago my client took out an offshore investment bond. He subsequently went to work abroad on a long-term contract. He returned to the UK in March 2008 having being non-UK resident for just over ten years. He now wishes to surrender the bond in order to help his daughter purchase her first house. Given that he will be a higher rate taxpayer in the 2008/09 tax-year and the bond is showing a significant gain, if he first assigns the bond to his daughter who then subsequently triggers the surrender, could she claim time apportionment relief even though she has never previously been non-UK resident for tax purposes?

The rules that govern the application and availability of time apportionment relief are set out in ITTOIA 2005/ss.528-9. These have the effect of reducing the amount of the gain of an offshore policy that will be liable to UK income tax so asto reflect any periods during the policy term when the policyholder was not UK resident. The gain is reduced by an appropriate fraction equal to A/B, where

• A is the number of days on which the policy holder was not UK resident in the policy period, and
• B is the number of days in that period.

For the purposes of applying the legislation, the “policy period” means the number of days the policy has run before the chargeable event that gave rise to the gain occurs. According to HMRC guidance (IPTM3740) this encompasses both the day on which the policy was effected and on which it was surrendered.

On a strict reading of ITTOIA 2005/s.528, the term “policyholder” would seem to mean the person(s) on whom the gain is assessable to tax – thereby preventing your client’s daughter from claiming the relief. However, in the Explanatory Notes (vol.2) that accompany ITTOIA 2005, note 626 makes it clearthat: “The policyholder and the person or persons liable to tax may not be the same.” Therefore your client’s daughter would be able to claim time apportionment relief to reflect the period of time your client was non-resident whilst the policy was in force.

It should be noted that for the purposes of top-slicing relief there is a corresponding reduction in the number of relevant years that can be claimed. The number of complete policy years over which the gain can be spread will be reduced by the number of complete years the “policyholder” was non-resident. Furthermore, ITTOIA 2005/s.529 serves to prevent a claim for time apportionment relief in respect of policies issued after 19/03/1985 when the “policyholder” has included non-resident trustees.

If any relief for periods of non-residence is available it is the responsibility of the person liable to tax to calculate the apportioned gain and enter it on their tax return. As such, the assessable person(s) need to be aware that the chargeable event certificate issued in respect of such a gain will show the full, unrelieved gain realised on the policy.