Introduction
For UK expats holding offshore life assurance policies, the interaction between UK tax law and international insurance structures is one of the more technically demanding areas of personal finance. The rules differ depending on whether the policy is a pure protection product or has an investment component, whether it is held personally or through a trust, and whether the policyholder is UK-resident when a chargeable event occurs. This guide sets out how HM Revenue & Customs (HMRC) treats offshore life assurance for UK expats as of 2026, including the significant changes to inheritance tax that came into effect in April 2025.
Pure Protection vs. Investment-Linked Policies
The starting point is understanding what type of offshore policy you hold.
Pure life assurance pays a fixed lump sum on death and nothing on survival. Because there is no investment return, there is no chargeable event and no income tax liability on the payout. A death benefit from a pure term policy is not income; it is capital, and HMRC does not impose income tax on it.
Investment-linked policies — including whole-of-life with an investment element, universal life policies, and offshore endowments — combine life cover with a fund that grows over time. When such a policy is surrendered, partially encashed, or matures, HMRC treats the gain (proceeds minus premiums paid) as a chargeable event gain, which is added to the policyholder's income and taxed accordingly.
Most offshore life assurance arranged for UK expats through reputable providers in the Isle of Man, Guernsey, or Bermuda will fall into one of these two categories. It is critical to know which applies to your policy before making any claim or surrender.
Chargeable Event Gains: The Basics
Under the Income Tax (Trading and Other Income) Act 2005, a chargeable event gain is treated as income in the tax year it arises, subject to income tax at the policyholder's marginal rate. The gain is calculated broadly as:
Surrender value (or death benefit in excess of premiums) – total premiums paid
Where a policy has been partially encashed in previous years, those withdrawals are taken into account. HMRC allows a 5% annual allowance on offshore policies — policyholders may withdraw up to 5% of total premiums each year on a cumulative basis without triggering an immediate chargeable event. Once the cumulative withdrawals exceed the allowance, the excess becomes a chargeable event gain in that tax year.
Top-Slicing Relief
Top-slicing relief is a mechanism that can significantly reduce the income tax due on a chargeable event gain. Rather than adding the entire gain to a single year's income — which may push the policyholder into the higher or additional rate — HMRC allows the gain to be spread (or "sliced") across the number of complete years the policy has been in force.
The calculation determines the tax on the average annual slice and multiplies it to find the total liability. If the averaged slice does not cross a higher tax band, the policyholder may pay basic rate only, or even nothing if their personal allowance covers the slice.
For UK-resident policyholders, top-slicing relief is claimed on the self-assessment tax return in the year of the chargeable event. For non-UK residents, the position is more complex and depends on the individual's residence history and any applicable treaty.
Non-Residence and Chargeable Event Gains
A policyholder who is not UK-resident in the tax year the chargeable event occurs may nonetheless be liable to UK income tax if they were UK-resident for any of the years the policy was in force. HMRC applies a time-apportionment calculation: only the proportion of the gain attributable to years of UK residence is brought into charge.
If the policyholder was non-UK-resident for the entire period the policy was in force, no UK income tax liability arises on the chargeable event gain. This is a significant planning point: where an expat takes out an offshore policy after leaving the UK and remains non-resident throughout, any future investment gain on that policy should fall outside the UK income tax net entirely — subject always to advice on individual circumstances and any treaty position.
Policies Held in Trust: Income Tax Position
Where a life assurance policy is held in trust, the question of who is liable for any chargeable event gain depends on the trust structure. In a discretionary trust, the gain is generally assessed on the settlor (the person who created the trust) if they are alive and UK-resident. This is an important point: simply placing a policy in trust does not remove the income tax liability on a chargeable event — it affects inheritance tax, not income tax.
For pure protection policies held in trust, this distinction is largely academic, since no chargeable event gain arises on death. The trust structure primarily delivers the inheritance tax benefit.
Inheritance Tax: Policies in Trust
Before April 2025, the standard rule was that UK-domiciled individuals faced inheritance tax (IHT) at 40% on their worldwide estate above the nil rate band of £325,000. The residence nil rate band (RNRB) of up to £175,000 is available where a main residence passes to direct descendants, bringing the combined threshold for a married couple to up to £1 million in some circumstances.
A life assurance policy not written in trust forms part of the deceased's estate and is subject to IHT. Writing the policy in trust at inception removes it from the estate entirely — the trustees hold the proceeds for the benefit of the named beneficiaries, and the payout does not pass through probate.
The April 2025 Changes: Long-Term Residence
From April 2025, the concept of domicile has been replaced — for IHT purposes — with a long-term residence test. Individuals who have been UK-resident for 10 or more of the previous 20 tax years are treated as long-term UK residents, and their worldwide assets (not merely UK assets) become subject to IHT on death.
This change has material implications for UK expats. Someone who lived in the UK for 20 years before moving to Dubai, Spain, or Cyprus may continue to be subject to UK IHT on their global estate for several years after departure, depending on the count of UK-resident years in the relevant 20-year window.
For such individuals, a life assurance policy written in a properly constituted trust becomes even more important: it removes the policy proceeds from the estate regardless of the long-term residence calculation.
Double Taxation Treaties
The UK has an extensive network of double taxation treaties (DTTs), and some of these treaties address the taxation of insurance proceeds. Where a DTT applies, it may limit the UK's right to tax a chargeable event gain arising on a policy held by a resident of the treaty partner country.
Treaty provisions differ significantly between jurisdictions. The UK–UAE treaty, the UK–Cyprus treaty, and the UK–Spain treaty each have specific provisions on income sourcing and residence. Expats in any of these countries should take specialist advice on whether a treaty position is available to them before surrendering or claiming under an investment-linked offshore policy.
Practical Planning Points
- Write all new policies in trust at inception. Retrospective trust arrangements can trigger IHT gift-with-reservation issues. Inception is the right time to establish the trust structure.
- Know your policy type. Confirm whether your offshore policy is a pure protection contract or investment-linked, and obtain the insurer's chargeable event certificate template so you understand how a gain would be calculated.
- Keep records of premiums paid. HMRC will require evidence of the full premium history to calculate the gain accurately.
- Assess residence status carefully before any surrender. A surrender while non-UK-resident — particularly where no UK-resident years apply — may eliminate UK income tax entirely.
- Review after April 2025. If you have been UK-resident for 10 or more of the past 20 years, you may still be within the IHT net. A trust structure is the most straightforward remedy.
How Global Investments Can Help
Global Investments has advised UK expats on international protection and tax planning for over 32 years. Our advisers can review your existing offshore policies, assess your current residence and domicile position, and advise on whether trust structures, beneficiary nominations, or policy restructuring are appropriate given the post-April 2025 IHT framework.
We work with providers regulated in the Isle of Man, Guernsey, and other established jurisdictions, and we coordinate with tax and legal specialists where cross-border complexity requires it.
This guide is for information only and does not constitute tax or legal advice. Tax rules can change, and their application depends on individual circumstances. Always seek qualified professional advice before making decisions about life assurance policies or trust structures.
Frequently Asked Questions
Is a life assurance death benefit taxable in the UK?
A pure life assurance payout — one with no investment element — does not trigger a chargeable event and is not subject to income tax. If the policy is written in trust, the proceeds also fall outside the estate for inheritance tax purposes. Investment-linked policies such as universal life or endowments may produce a chargeable event gain on surrender or maturity.
What is a chargeable event gain on an offshore policy?
A chargeable event arises when an investment-linked offshore policy is surrendered, matures, or has an excessive withdrawal. The gain — broadly the proceeds minus premiums paid — is treated as the top slice of the policyholder's income in the year of the event. Non-UK residents at the time of the chargeable event may have limited or no UK tax liability on that gain, depending on their residence history.
How does top-slicing relief work?
Top-slicing relief reduces the income tax due on a chargeable event gain by spreading it over the number of complete years the policy has been in force. This can reduce or eliminate higher-rate tax if the averaged slice does not push the taxpayer into a higher band. It applies to UK-resident policyholders; non-residents making a claim must take advice on whether it applies in their circumstances.
Do the April 2025 IHT changes affect offshore life policies?
From April 2025, long-term UK residents — broadly those who have been UK-resident for 10 or more of the previous 20 tax years — have their worldwide assets brought within the UK inheritance tax net on death. A life assurance policy not written in trust would form part of that worldwide estate. Writing the policy in trust at inception removes it from the estate regardless of the 10-year rule.
Does a double taxation treaty affect a chargeable event gain?
If the policyholder is resident in a country that has a double taxation treaty with the UK, the treaty may restrict the UK's right to tax a chargeable event gain, particularly where the policyholder has been non-resident for the entire policy term. Treaty provisions vary; specialist advice is required for each jurisdiction.
This guide is for general information only and does not constitute financial or insurance advice. Policy terms, premium rates, and insurer eligibility criteria change — always verify current terms with a qualified independent adviser before taking out any policy.