Income Tax (Trading and Other Income) Act 2005 section 539

Relief for deficiencies

Section 539 provides a tax reduction for higher-rate taxpayers when a deficiency arises on a life insurance policy, life annuity contract or capital redemption policy, because the overall gain turns out to be less than the amounts previously taxed as chargeable event gains.

• An individual may claim a tax reduction in a tax year when a deficiency arises from a policy or contract on a chargeable event, provided they would otherwise be liable to tax at the higher rate, Scottish higher rate, Welsh higher rate or dividend upper rate
• The relief is available only if, had a gain arisen instead of a deficiency, the individual would have been liable to income tax on it — and for this purpose the UK residence requirement is disregarded, so non-UK residents with other UK taxable income are not excluded
• The tax reduction is calculated by comparing the individual's preliminary income tax liability with a recalculated liability in which income attributed to the deficiency is taxed at basic rate (or dividend ordinary rate for dividend income) instead of higher rates
• Scottish and Welsh taxpayers follow modified steps that account for the interaction between devolved higher rates and the savings higher rate, with a tie-break rule treating the Scottish or Welsh higher rate as the higher of the two when the rates are equal