Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN35 Life insurance policies and commission arrangements

Who is likely to be affected?

1   Persons who invest premiums exceeding 100,000 in any year into short to medium-term life insurance policies, capital redemption policies or life annuity contracts where commission is passed on or reinvested in the policy by an intermediary.

General description of the measure

2   Legislation will be introduced in Finance Bill 2007 to clarify that, where a policy or contract is held for less than a specified period, the amount of premium allowed in calculating gains on these large, short-term, policies and contracts is restricted to the true cost to the policyholder, taking into account the benefit to the policyholder of any commission rebate.

3   Legislation will be introduced in Finance Bill 2007 to clarify that, where a policy or contract is held for less than a specified period, the amount of premium allowed in calculating gains on these large, short-term, policies and contracts is restricted to the true cost to the policyholder, taking into account the benefit to the policyholder of any commission rebate.

4   The legislation targets policies that are used in schemes to avoid tax on investment income. The legislation will give HM Treasury the power to change the premium limits and the specified holding period through Treasury Orders.

Operative date

5   The measure has effect for all policies and contracts made on or after 21 March 2007. It also applies to all existing policies and contracts into which a policyholder chooses to pay further premiums on or after 21 March 2007.

Current law and proposed revisions

6   The chargeable events legislation, which applies to certain life insurance policies and contracts is contained in Chapter 9 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 and Chapter 2 of Part 13 of the Income and Corporation Taxes Act 1988. In calculating a gain on the surrender, maturity or assignment for money or money's worth of a life insurance policy, capital redemption policy or life annuity contract, the legislation allows for a deduction for "premiums paid". The meaning of "premium" is not defined in the legislation.

7   This measure will make clear that, for policies and contracts within its scope, the amount of premium that will be allowable in calculating any gain on these chargeable events

•   is reduced by the amount of any commission which is passed on to a policyholder or connected person by an intermediary such as a financial adviser

•   does not include any amount of commission waived by an intermediary that is reinvested in the policy, for instance by enhancement of units.

8   Subject to the commencement rule and an anti-fragmentation rule, this measure will apply to any policy or contract on which a person is potentially liable for chargeable event gains where

•   the premiums paid under the policy or contract exceed 100,000 in any given tax year, and

•   the policy or contract is surrendered, matures or is assigned for money or money's worth before the end of the third tax year after that in which the premium threshold is crossed.

9   The measure will apply to

•   policies and contracts made on or after 21 March 2007, and

•   existing policies and contracts where the benefits secured are increased on or after that date, either by a variation of the policy or contract, or by the exercise of an option in the policy or contract

10 The measure will ensure that where commission is passed on by an intermediary, the insurer is required only to report to the policyholder and to HMRC the amount of any chargeable event gain calculated under the existing reporting rules. This is because the insurer is unlikely to be aware of any such rebate. The person liable to pay tax on the gain must add the amount of rebate to any gain reported on the certificate to arrive at the amount to include in their self-assessment return.

Further advice

11 Draft legislation is available on the HM Revenue and Customs website.

12 If you have any questions about this change, please contact Daniel Berry on 020 7147 2574 (email: daniel.berry@hmrc.gsi.gov.uk) or Steve Gilbody on 020 7147 2606 (email: steve.gilbody@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk