Deficiency relief is only available where the calculation on surrender generates a loss and this loss is because of previous gains. For example, if someone invested £200,000 in a bond in 2009 and withdrew 10% of this in the first year this would have generated a gain of 5% (i.e. £10,000), being the difference between the withdrawal and the 5% allowance.
If that person goes on to surrender their bond for £185,000 after 5 April 2010 the overall proceeds from the bond are £205,000 against a premium of £200,000, so the economic profit is £5,000. The amount taxed already of £10,000 exceeds this economic profit, so a deficiency of £5,000 arises.
Whilst the change in the rules announced in the Budget means that deficiency relief is available against the highest rate of tax applicable to a customer, this still doesn’t mean that the repayment received will be 50% of the loss. This is because bond customers can only recover the tax paid in excess of the basic rate amount, so the maximum actual recovery is 30%.
Deficiency relief is not available on economic bond losses. Therefore, if someone invests £100,000 in a bond and cashes it in for £80,000 (with the loss resulting from poor investment performance) deficiency relief is not available.
There will be anti-avoidance rules to prevent people triggering gains when paying tax at low rates with the intention of getting deficiency relief at a higher rate later.
