Income Tax (Trading and Other Income) Act 2005 section 540

When deficiencies arise: events following calculation events

Section 540 sets out the conditions under which a deficiency is treated as arising from a life insurance policy or capital redemption contract when a chargeable event occurs after an earlier gain has been calculated on the same policy or contract.

• A deficiency can only arise on certain types of chargeable event, such as full surrender of rights, final participation in profits, death, maturity, or taking a capital sum as a complete alternative to annuity payments
• There must have been an earlier gain on a "calculation event" (other than a personal portfolio bond event) relating to the same policy or contract
• The gain calculation under the standard rules must produce no gain on the later chargeable event
• Although gains from personal portfolio bond events are excluded when determining the earlier gain for deficiency purposes, they are not excluded from the overall calculation used to establish whether a loss has arisen