Partial surrender foreign life insurance policy for non-resident years

Hi there, The HS321 states that one can withdraw up to 5% of the premium paid without leading to a gain each year: > You may also have made a gain which is only taxable when your policy ends. > This is because in each insurance year you can withdraw up to 5% of the premium paid > into your policy without a gain happening in that year https://www.gov.uk/government/publications/gains-on-foreign-life-insurance-policies-hs321-self-assessment-helpsheet/hs321-gains-on-foreign-life-insurance-policies-2020 If a such foreign life insurance policy was e.g. opened in 2004 with an initial deposit of 100 000 euros and no other deposit or withdrawal made after, how much of that premium could be withdrawn under the 5% rule in year 2024 if the policy holder only became fiscal resident in the UK in 2014 ? In other words, is the 5% per year rule conditional on being a fiscal resident for any given year, or does it only matter that the holder is fiscally resident at the point where the partial surrender is actually done ?

Hi,

In each insurance year you can withdraw up to 5% of the premium paid into your policy without a gain happening in that year. An insurance year begins on the anniversary of the date of your policy was taken out and ends on the day before the anniversary in the next year, except in the final insurance year. The 5% takes into account regular pay outs or withdrawals.

If, for example, you do not make any withdrawals in an insurance year, the full amount of the 5% ‘annual allowance’ is carried forward. This means that in the second insurance year, if you have not made a withdrawal in the first insurance year, you can withdraw up to 10% of the premium paid without a gain happening in that second insurance year.

Thank you.

> In other words, is the 5% per year rule conditional on being a fiscal resident for any given year, or does it only matter that the holder is fiscally resident at the point where the partial surrender is actually done ? So you confirm that the fiscal residency has no bearing at all in that rule ? The question is specifically about how this rule is applied in a scenario where fiscal residency changed from a foreign country to the UK while the policy was opened.

Hi,

As the guidance relates to a foreign policy, the 5% withdrawal would imply that you are UK resident at the time of withdrawal.

Any withdrawals prior to your arrival in the UK would therefore not be taxable here.

Thank you.

Hi, how does fiscal residence in the years _before_ withdrawal impact what is allowed ? As per my original question: > If a such foreign life insurance policy was e.g. opened in 2004 with an initial deposit of 100 000 euros and no other deposit or withdrawal made after, how much of that premium could be withdrawn under the 5% rule in year 2024 if the policy holder only became fiscal resident in the UK in 2014 ? I'm still not clear on how years before becoming fiscally resident in the UK are accounted for. If I spent 20 years resident in another country and 1 second resident in the UK, am I allowed to withdraw 100% of the premium without a taxable event ? Thank you

Hi User12349adc

We cannot advise you how much you can withdraw from your life insurance policy.  We can only provide you with the guidance to help you work this out for yourself.  
You may need to discuss with your policy provider or seek professional financial advice.

Thank you

I am not asking how much I should withdraw from my life insurance policy. I was presenting a completely made up example where the answer would have shown clearly the mechanisms at work. The question: does the year on which one becomes fiscally resident in the UK impact how much they can withdraw in total under the 5% rule, assuming they are fiscally resident at the time they do the withdrawal ? In order to make it extra obvious that I am not asking for a financial advice, let's change the numbers: if a life insurance policy was opened 10 million years ago while fiscally resident in another country, would the policy holder be able to withdraw 100% if the premium paid if they became fiscally resident in the UK yesterday without triggering a taxable event ? This example is strictly designed to show how the mechanism behaves and is not an ask for financial advice. No policy holder has ever lived that long nor will ever live that long.

Hi User12349adc,
Please refer to guidance here:
HS321 Gains on foreign life insurance policies (2024)
As this relates to foreign policies, this would reflect that you are UK resident at the time of surrender/withdrawal.
Thank you. 

 

Hi HMRC admin, I refer to the issue of withdrawal up to 5% of the premium paid of the non-UK policy per year. If I'm doing so and remitting the same from aboard, shall I report to HMRC? Thank you very much.

Hi,
The 5% withdrawal is not tax free, it is tax deferred.  
This is because in each insurance year you can withdraw up to 5% of the premium paid into your policy without a gain happening in that year.  
As there is no gain, there is nothing to report to HMRC.  
The policy provider will account for all amounts paid from or withdrawn from a policy have to be added into the calculation made when your policy ends.  
Please have a look at helpsheet HS321 at HS321 Gains on foreign life insurance policies (2024)
Thank you.