Inland Revenue 38
17 March 1998
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TAXATION OF LIFE INSURANCE POLICY HOLDERS
The Chancellor announced today changes that will close
loopholes involving the taxation of gains from life insurance
and similar policies. The proposals will help to bring
greater fairness to the tax system and reduce the
opportunities for avoidance.
The changes affect the tax treatment of policies held in trust
and personal portfolio bonds. New rules will also be
introduced to require certain non-UK life insurance companies
to appoint a tax representative in the UK and alter the tax
treatment of life insurance policies sold overseas by UK
insurers.
The effective dates for each of these changes are set out in
the details below.
The yield from these changes is negligible in 1998-99, 30
million pounds rising to 150 million pounds in a full year
DETAILS
1. There are special rules for taxing gains made by those
who hold certain life insurance policies. A "gain" is broadly
the difference between the amount received and the premiums
paid. A tax charge may arise on death, when the policy
matures or when there is a surrender or sale of some or all of
the rights under the policy. These are known as chargeable
events.
Trusts
2. Where a policy is held in trust, the liability for any
tax due on a gain generally falls on the person who created
the trust - sometimes known as the "settlor". If the settlor
is dead or is not resident in the UK at the time of the
chargeable event, a defect in the existing legislation may
mean that no one is liable for any tax due on a gain.
3. Under the Budget proposals, this anomaly will be removed.
In those circumstances the trustees, if they are resident in
the UK, will become liable to pay tax on the gain. If the
trustees are not resident in the UK, a tax charge may fall on
a UK beneficiary under the trust to the extent that he or she
receives benefits from the trust funds. Existing
anti-avoidance rules governing the transfer of assets abroad
will be applied to give effect to this. The chargeable event
gain will be treated as part of the pool of trust income
available for distribution to the beneficiaries. The
legislation will be widely drawn to include arrangements
similar to trusts and entities that operate like trusts.
4. The new rules will apply to chargeable events which occur
on or after 6 April 1998. They will not apply to existing
policies held in trust if the person who created the trust has
died before, and the policy is not enhanced in any way on or
after, today.
Personal Portfolio Bonds
5. A "personal portfolio bond" is a type of insurance policy
where the benefits due under the policy are or may be closely
linked to a portfolio of assets that is personal to the policy
holder. With this type of policy, the policy holder retains
nearly all of the benefits of direct personal investment.
6. This type of bond is designed primarily for tax avoidance
purposes and is usually held with a non-UK insurer. Because
the holder can decide when to surrender the policy, he or she
is able to defer for many years the tax charge on any income
or gain arising on the investments held in the policy. The
policy holder can even arrange to be non-resident when the
policy comes to an end and so escape paying tax altogether.
7. Under the Budget proposals, there will be an additional
tax charge on a deemed "gain" equal to 15 per cent of the sum
of the total premiums paid up to the end of each "policy year"
and the total of deemed "gains" from previous years. A
policy year ends on the day before the anniversary of the
making of the insurance.
A deemed "gain" would also arise when the policy terminates or
any other chargeable event occurs. The charge on the deemed
"gain" will be in addition to the normal tax charge which
would arise on a chargeable event.
8. The chargeable person in respect of the deemed "gain"
would be the same person as would be chargeable in respect of
any other chargeable event gain.
9. The additional annual tax charge will not be imposed in
respect of any policy year which ends before 6 April 1999.
This deferred start date will give those who have purchased
these bonds the opportunity to surrender them before the
proposed annual charge arises.
Tax Representatives
10. Non-UK insurance companies are able to sell insurance in
the UK either directly or through an independent financial
adviser without the need to set up a branch or agency in the
UK. This is known as selling on a "services" basis. The
recent heavy growth of this type of business and the
difficulties of enforcing a non-UK insurer's obligation to
provide information about chargeable event gains have
put a significant amount of tax at risk.
11. Under the Budget proposals, a non-UK insurer who sells a
significant amount of services basis insurance in the UK will
be required to appoint a tax representative. The
representative, who must have a permanent business
establishment in the UK or, if an individual, be resident
here, will be responsible for meeting the duties imposed on
the insurer by section 552 of the Income and Corporation Taxes
Act 1988.
12. The date from which the obligation to appoint a tax
representative has not yet been determined. It will be fixed
at a later date by statutory instrument but will not be before
1 April 1999.
Overseas Life Assurance Business ("OLAB")
13. Overseas life assurance business is life assurance
business written by UK insurers with policy holders who are
resident outside the UK. The insurance company writing this
business is exempt from tax on the income and gains backing
the business. In most cases where a non-resident holding an
OLAB policy comes to live in the UK the income and gains
remain tax exempt in the company's hands. But if the policy
holder makes a gain on the policy he or she is treated as if
tax had been paid by the company and is not charged to tax at
the basic rate. This anomaly has been exploited by some of
those selling insurance policies to expatriates who are
expecting to return to the UK. It is unfair to policy holders
who have always been resident in the UK. The Budget proposals
will remove this credit for tax that has not in fact been
charged or paid. This will apply where a gain arises on an
OLAB policy taken out or enhanced on or after Budget day.
14. The Finance Bill will contain powers to enable
regulations to be made to cover some of the detailed
provisions relating to tax representatives and personal
portfolio bonds.
NOTES FOR EDITORS
1. On 8 October 1997, the Financial Secretary to the
Treasury, Dawn Primarolo MP, announced that the Government had
decided, in the light of the responses received in
consultation, not to proceed with the package of proposals
for the reform of policy holder taxation set out in the
consultative document published on 27 November 1996. Instead
the Inland Revenue was to give further consideration to those
proposals aimed at closing the main avoidance loopholes connected
with the taxation of gains from life assurance and similar policies.
2. Section 552 of the Income and Corporation Taxes Act 1988
imposes a duty on insurers in certain circumstances to deliver
to the Inland Revenue certificates giving details about
certain chargeable event gains and to allow the Inland
Revenue to carry out audits to ensure that the certificates
issued are correct.
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