81 AND SCHEDULE 27: LIFE POLICIES, LIFE ANNUITY CONTRACTS AND CAPITAL
This Clause introduces Schedule 27. Part I of the Schedule deals
with assignments of life policies or contracts for consideration by
or to joint owners and ensures that in certain circumstances the assignment
will be treated as a part assignment for the purpose of taxing chargeable
event gains. It also provides that where a share of the rights under
a policy or contract is assigned or surrendered any gain is attributed
to the person whose interest is thereby reduced. Part I has effect
for years beginning on or after 6 April 2001. Part II provides for
life insurers to notify policy holders about the chargeable event
gains they make and sets out the circumstances in which the life insurer
will also have to report the gain to the Inland Revenue. It has effect
for chargeable events happening, or treated as happening, on or after
6 April 2002.
The Government has decided to clarify and simplify the tax treatment
of transfers of shares in life insurance products. The Clause and
Schedule put beyond doubt the tax position when there is a part assignment
of the interests or rights under a life policy or contract, and at
least one of the parties involved has an interest in that policy or
contract both before and after the transfer. The effect of the changes
will be to ensure that the tax charge will apply to the share in the
rights under the policy that the person making the transfer is giving
The Government has also decided that where a share in the rights under
a policy or contract is transferred the person liable to any tax that
is due on the gain that arises as a result of the transfer shall be
the person who gives up the interest. These changes will ensure that
the law will operate as originally intended and that the interests
transferred and tax charges that arise in respect of them will be
the same in all parts of the United Kingdom. As a further simplification,
the Government has decided that transfers of interests in part of
the rights under a policy or contract that are made for no consideration
shall no longer be liable to tax.
To make it easier for policy holders who have made gains on their
life policies or contracts to complete their self assessment returns,
the Government has decided to require insurance companies to give
their policy holders the details they need to complete their returns.
Where the gain made is large the insurer will also be required to
give details of the gain to the Inland Revenue.
OF THE CLAUSE
Subsection (1) provides for Schedule 27 to amend Chapter II
of Part XIII of the Income and Corporation Taxes Act 1988.
Subsection (2) provides that the amendments made by Part I
of the Schedule which relate to the assignment or surrender of part
of, or a share in, the rights conferred by a policy or contract take
effect in any policy year beginning on or after 6 April 2001.
Subsection (3) provides that the amendments made by Part II
of the Schedule which relate to the provision by insurers of information
relating to chargeable events have effect on or after 6 April 2002.
OF THE SCHEDULE
Paragraph 1 provides for the amendment of Chapter II in accordance
with the provisions of the Schedule
Paragraph 2 inserts a new subsection in section 539, the introductory
provision. This provides for an assignment of the whole of, or assignment
of part or a share in, the rights conferred by a policy or contract,
in any case where the conditions set out in new section 546A apply,
to be treated as a part assignment.
Paragraphs 3 to 7 make minor consequential changes to ensure that
the new rules operate properly. In general these operate to change
the way section 546 currently operates. Section 546 lays down rules
that determine whether there has been a gain on a part surrender or
part assignment of the rights under a life policy or contract. If
the calculations required by the section produce what is known as
an ‘excess’ the occurrence of that excess is treated as a chargeable
event and the gain that is chargeable to tax is the amount of that
excess. In the new sections this is referred to as the section 546
Paragraph 3 amends section 540 which applies to life policies.
Subparagraphs (2) and (3) insert into section 540(1)(a) and (1)(b)
respectively a condition that an excess under section 546 at the end
of year will be subject to new rules where there has been a part assignment
for money or money's worth during the year.
Paragraphs 5 and 7 amends the corresponding provisions for
life annuity contracts (section 542) and capital redemption policies
Paragraph 4 amends section 541 which provides for the computation
of chargeable event gains on life policies. Subparagraph (2) introduces
an additional amount into the computation of a chargeable event where
there has previously been a part assignment for money or money's worth.
Subparagraph (3) provides that the choice of method for computation
of an excess will be subject to whether there has been a part assignment
during the policy year. Subparagraph (4) repeals subsection (4) as
new sections 546B to 546D supersede it.
Paragraph 6 amends, in a similar manner to paragraph 4(2) and
(3), section 543 which provides for the computation of gains on life
Paragraph 8 amends section 546 Subparagraph (2) ensures that
part assignments alone which are not for money or money's worth will
not give rise to an excess gain. Subparagraph (3) provides, in any
case where a part of or share in the rights conferred by a policy
or contract is assigned, that the value attributed to it is the surrender
value of the part assigned.
Paragraph 9 inserts new section 546A after section 546.
New Section 546A(1) applies to a change of ownership of the
whole or part of or a share in the rights conferred by a policy or
contract. Its application is limited to those cases where at least
one of the persons involved had an interest in the rights both before
and after the change in ownership. A further condition is that before
the change it was owned either jointly or by one person alone and
after the change owned by one person or by more than one person either
jointly or in common.
New Section 546A(2) provides that a change of ownership of
this kind is one or more assignments of part only of the rights conferred
by the policy or contract
New Section 546A(3) provides that where two or more persons
are joint owners they are to be treated as owning equal shares and
not as joint owners and the original owners are treated as if they
had assigned a material interest of their original share. It defines
the material interest to be any increase in an original share or the
original share where the person is no longer an owner.
New Section 546A(4) defines new share and old share for each
Paragraph 10 inserts New Sections 546B, 546C and 546D after
New Section 546A. These provide for the modification of the treatment
of the section 546 excess in certain cases.
New Section 546B(1) provides for the section to apply where
a section 546 excess occurs, whether or not the year is a final year,
and the condition in subsection (2) applies.
New Section 546B(2) sets out the condition to be satisfied
that there has been either a part assignment for money or moneys worth
or there has been a part surrender followed by a gift by way of a
part assignment or assignment of the whole in the year.
New Section 546B(3) sets aside the normal chargeable event
on the occurrence of an excess in place of the charge to tax made
under New Section 546C.
New Section 546B(4) provides various definitions.
New Section 546C(1) provides the rules for taxing a section 546
excess where because of New Section 546B that excess is not to be
brought into charge in the normal way.
New Section 546C(2) sets out a series of calculations to establish
how much of the allowable aggregate amount (an amount based on the
age of the policy), calculated to the end of the year, as under the
existing rules is available to offset the sum of values assigned or
surrendered in that year.
New Sections 546C(3),(4),(5) and (6) provide the computational
rules to establish which amounts of the aggregate value that are referable
to each relevant transaction will give rise to a chargeable event.
The amount produced by New Section 546C(2) is allocated to these transactions
in the order they occurred on the basis of each value assigned for
money or money’s worth or surrendered. Each excess is compared in
turn until the amount produced by New Section 546C(2) is exhausted.
New Section 546C(7) provides that where there is an excess
remaining for any relevant transactions it will be a chargeable event
and that the amount of the gain is the amount of the excess.
New Section 546C(8) provides that while the chargeable event
is treated as arising on the date of the relevant transaction, it
is to be charged to tax in the year of assessment or accounting period,
if a company, in which the policy year ends if that is different from
the one in which event occurred.
New Section 546C(9) provides that the computation under this
section takes priority over the provisions elsewhere in Chapter II
for the computation in respect of the final year and that any New
Section 546C chargeable event is treated as having occurred before
the final year chargeable event.
New Section 546D provides for modifications to the New Section
546C computation if it applies in a final year which would also give
rise to a final year chargeable event.
New Section 546D(2),(3) and (4) provide that a charge under
New Section 546C in the final year is not to exceed what would otherwise
be the charge on a final year chargeable event if the New Section
546 C charge did not arise. The gain under the chargeable event rules
is computed as if these new provisions had not been applied. That
figure is compared with the amount which would be charged to tax under
the new rules. If it is less, the New Section 546C excess computations
are applied to the amount of the gain on the final chargeable event
That amount is then allocated to the relevant transactions as provided
by New Section 546C.
Paragraph 11 makes consequential changes to section 547 which
provides methods of charging a gain to tax.
Paragraph 12 makes consequential changes to section 547A which
deals with multiple interests.
Paragraphs 14,15 and 16 make additional consequential changes.
Paragraph 18 replaces the whole of section 552 with a New Section
552 and inserts a New section 552ZA.
New Section 552(1), (2), and (5) provide what information a
life insurer is required to deliver, and to whom, when a chargeable
event gain arises in connection with an insurance made with the insurer.
The insurer is required to deliver a certificate containing the information
specified in New Section 552(5) both to the appropriate policy holder
and also, in certain circumstances, to the Inland Revenue. The conditions
requiring a certificate to be sent to the Inland Revenue are that
the event is a whole assignment for money or money’s worth or that
the gain or the aggregate of connected gains in a year of assessment,
exceeds half the basic rate limit.
New Section 552(3) provides that instead of delivering certificates
to the Inland Revenue only when the gain or aggregate of connected
gains in a year of assessment exceeds half the basic rate limit, the
insurer may choose to deliver a certificate for each gain it has to
report on a certificate to the policy holder, provided the certificates
are delivered in a manner and form prescribed by the Inland Revenue.
New Section 552(4) provides that where the insurer is required
to deliver a certificate to the policy holder but not to the Inland
Revenue, the Inland Revenue may issue a notice requiring the insurer
to send to it a copy of what it sent to the policy holder.
New Section 552(6) fixes the latest date by which the insurer
must deliver a certificate to the policy holder, if required to do
New Section 552(7) fixes the latest date by which the insurer
must deliver a certificate to the Revenue, if required to do so.
New Section 552(8) provides which gains are to be treated as
being connected with other gains for the purposes of determining whether
the aggregate of gains exceeds half the basic rate limit.
New Section 552(9) sets out to which year of assessment a gain
arising to an individual or trustee is attributable and to which financial
year a gain arising to a company is attributable.
New Section 552(10) gives definitions.
New Section 552(11) and New Section 552ZA(1) provide that section
552ZA supplements New Section 552.
New Section 552ZA(2) restates what is currently in existing
section 552(2A). Where there has been a transfer of insurance business,
this subsection provides that the obligation to provide information
about gains under policies of life insurance and other insurances
falls on the insurer to which the business has been transferred, instead
of on the insurer with which the insurance was originally made.
New Section 552ZA(3) provides that the insurer may include
information on a certificate about more than one part surrender of
the rights conferred by an insurance. This is subject to the condition
that they happen during the same year and there is no part assignment
or an assignment for consideration in the period between the different
New Section 552ZA(4) sets out which policy holders the insurer
is required to send a certificate to when there is more than one appropriate
New Section 552ZA(5) introduces a new regulation-making power
which will be used to modernise the ways in which the Inland Revenue
is able to receive information. They shall use this power to prescribe
the form of certificates insurers are required to send it and their
manner of delivery. In particular it allows the Revenue to prescribe
different forms of certificate that may be delivered to it as hard
copies or electronically.
New Section 552ZA(6), (7) and (8) restate what is currently
in subsections (4A)(b), (4B) and (4C) of existing section 552. Under
these provisions the Inland Revenue may in regulations make provision
to audit information held by insurers in order to confirm compliance
with the requirement to notify chargeable event gains.
Paragraphs 19 and 20 make consequential adjustments to Section
552B Income and Corporation Taxes Act 1988 (duties of overseas insurers’
tax representatives) and to Section 98 Taxes Management Act (penalties
in relation to special returns etc.)
The tax treatment of the proceeds of life insurance contracts
(life policies, annuity contracts and capital redemption policies
other than annuity and pension contracts) depends on whether
the policy is a “qualifying policy” or a “non‑qualifying
policy”. A qualifying policy is one which is to last at least
10 years and requires the payment of regular premiums. The net proceeds
of a qualifying life insurance policy are not generally subject to
any further tax in the hands of the original policy holder (unless
The net proceeds (broadly the difference between the amount received
and the premiums paid) of a non-qualifying policy held with a UK insurer
are chargeable to tax at the difference between the relevant higher
rate(s) and the basic rate (i.e. 40%-22% = 18% for financial year
2000/2001). Tax at the basic rate on the investment return is treated
as having been paid by the insurer. There is no further tax charge
when the policy holder is not liable to tax at the higher rate(s).
This measure affects the taxation of life insurance policy holders
where the rights under the policy are assigned (transferred) where
there is some continuity of ownership. It removes the uncertainty
which currently exists under the Law of England and Wales and Northern
Ireland where before and after a transfer of ownership at least one
of the ownership arrangements is joint and at least one owner is the
same before and after the change. Under the current law, it would
be necessary for insurers to make inquiries to establish the nature
of the interest transferred because the legal process used does not
make it possible to determine what has been transferred. The measure
has no effect on assignments, known as assignations under Scots Law,
where the legal analysis of the transaction is clear.
In addition, even where the transaction is in economic terms correctly
characterised as a part assignment, the gain is not taxed on the person
who may have received value. The measure now ensures the recipient
of money (or money’s worth) is correctly taxed. The measure also
provides that policy holders who have made gains on the insurance
‘policies’ which might be taxable are placed in the position to return
these gains under the self assessment regime. It does this by requiring
insurers to send information about the policy holder’s gains to the
policy holder rather than to the Inland Revenue.
this measure, the uncertainty of the legal process would require intrusive
and perhaps extensive inquiries to establish the true nature of the
interest transferred and could result in some cases in different outcomes
between Scotland and elsewhere in the UK. These inquiries where a
couple might be going through a divorce would be unwelcome and the
difference in outcomes notwithstanding the economic similarity of
the transaction makes it difficult to justify a different tax result
in different parts of the UK.
The measure makes these inquiries unnecessary, introduces consistency
throughout the UK and at the same time provides a welcome relief where
the part assignment is by way of gift. However, should the part assignment
(or assignment) by way of gift follow a part surrender in the same
year, the new legislation will ensure that any benefit of the part
surrender is taxed on the recipient of the money, the former policy