IR 13                                             29 November 1994

         FRIENDLY SOCIETIES:  TAX-EXEMPT POLICIES

The Chancellor proposes in his Budget to:

- increase from pounds 200 to pounds 270 the annual amount that an
  individual can  pay  in  premiums  under  tax-exempt life assurance
  policies issued by Friendly Societies;

- allow  the premium  under an existing tax-exempt policy to be 
  increased to  reflect  the new limit without the policy losing its 
  tax privileges;

- remove the statutory limitation on the surrender value of  a  
  qualifying  tax-exempt  policy that can be offered by  a friendly 
  society during the first ten years of the policy.

The Chancellor's intention is to encourage those traditionally served
by the friendly society movement in making provision for their future
and to remove an unnecessary restriction on the freedom of contract 
between societies and their members.

These  measures  will  take  effect  on  the  day  on  which  the 
Finance Bill receives Royal Assent.

                          DETAILS

Premium limit on tax-exempt policies.

1.    In  applying  the  limit  on premiums  payable  under tax- 
exempt  life  assurance  policies  allowance  is  made for the extra 
cost   involved   in  collecting  premiums at monthly rather   than  
annual  intervals. The  proposed annual limit of pounds 270  will allow
societies to provide  policies with premiums of  up  to  pounds 25  per  
month  written  on  their   tax-exempt funds.  Increase in premium. 


2.   In  general  tax-exempt  policies  are  designed  to  meet the  
conditions  for  a  "qualifying policy".   If  a  policy  is a  
qualifying  policy  then  once premiums  have  been  paid  for ten  
years,  or  for  seven  and a half  years  in  the  case  of some   
shorter   policies,   the  policyholder   can   take   the benefits  
from  the  policy without incurring  a  charge  to  tax on the profit
produced by the policy.

3.     The   conditions  for  a  qualifying  policy   include   a 
requirement  that  premiums  should  be  payable  year  by   year in 
equal   amounts.    The  measures   proposed   will   enable 
societies   to   offer  existing  holders  of   qualifying   tax- 
exempt   policies  the  opportunity  to  increase  the   premiums 
payable   for   the  future  without  losing   the   benefit   of 
qualifying status.

Limitation of surrender value.

4.    It  is  a  long  standing condition for a  qualifying  tax- 
exempt   policy  that  it  should  carry  an  express   condition 
limiting   the   surrender  value  of  the  policy   during   the 
first  ten  years,  or  seven and a half years  in  the  case  of 
some   shorter   policies,  to  a  maximum   of   a   return   of 
premiums.    It  is  proposed  that  this  condition  should   be 
removed  leaving  societies  free  to  offer  the  best  possible 
surrender value on their qualifying policies.

                     NOTES FOR EDITORS

1.     A   friendly   society  is  exempt   from   tax   on   the 
investment  return  from the fund in which  it  writes  its  tax- 
exempt  life  assurance  business and can  pass  the  benefit  of the
tax   free  roll  up  to  its  members  in  the   form   of enhanced 
 benefits   under   their  life   assurance   policies.  There  is  a
limit  on  the  level of  premium  that  a  society can  accept  from
an  individual member by  way  of  tax  exempt business.    As   
regards  the  individual  there  are   matching restrictions  to  
prevent  advantage  being  gained   by   taking out   policies  with 
more  than  one  society  to  a  total   in excess of the limit.

2. The limit on annual   premiums   under   tax-exempt policies   
issued by friendly societies was increased from pounds 100 to pounds 150
in  1990  and to the current level of pounds 200  in 1991. The cost  of 
the  proposed  increase to pounds 270 is expected to be negligible in the 
short term

3.     The   restriction  on  the  surrender  value  of  a   tax- 
exempt  policy  predates  the  imposition  of  a  charge  to  tax on 
the  early  surrender  of  a qualifying  policy.   The  early 
surrender of a qualifying  tax-exempt  policy  no longer provides  a 
route  to  a  tax  free short  term  investment  and the limitation 
of the surrender value is now redundant.