Despite the increasing popularity of warranty and indemnity (W&I) insurance policies, there is still a lack of certainty about how pay-outs under these policies would be taxed in the UK. This could have significant implications for UK taxpayers, as proceeds under W&I insurance policies will not be treated as an adjustment to the purchase price of the shares. This article considers how proceeds under buy-side policies may be treated as capital sums arising from the underlying shares. On this basis, the tax payable could be low, or even exempted. Despite this, buyers are advised to obtain a gross-up as part of the policy before agreeing to accept W&I insurance in lieu of standard contractual protection from the seller under the share purchase agreement (SPA), at least until the prevailing uncertainty has been resolved.
