The premium cap limits the tax advantages which investors currently obtain by investment in QPs, such as no liability to higher or additional rate tax. The change effectively closes down the use of certain qualifying policy products, so-called Maximum Investment Plans, by high net worth individuals, which became popular after changes to pensions rules in 2011.
On 15 June 2012 HMRC published a consultative document entitled “Life Insurance – Qualifying Policies”. The purpose of the consultation is to consider the various technical issues and practicalities while ensuring that the premium limit will be effective. In particular the following matters are to be considered:
Premium limit application
HMRC proposes that the limit be applied to ‘premiums payable’ in any 12-month period. This has the advantage that late payment of premiums will not cause the limit to be breached.
Impact of beneficial ownership aggregation of premiums.
Various restrictions are proposed to how qualifying policies issued on or after 6 April 2013 can be held in order to facilitate effective operation of the limit. In particular, HMRC proposes that:
- There may only be a single individual owner of the rights of a qualifying policy.
- Certain arrangements such as discretionary trusts will no longer be available for use in conjunction with qualifying policies.
- Assignment of beneficial ownership would automatically cause qualifying policy status to be lost.
Currently, joint ownership of qualifying policies is relatively commonplace (for example endowment policies) as is assignment on divorce or as security over a debt. These changes could further reduce the popularity of QPs to investors. To reduce the impact on the sector, perhaps certain assignments should continue to be permitted without breaching QP status
There are currently no reporting requirements under the QP regime, so the proposals will impose an additional compliance and financial burden on the sector. Insurers (and Friendly Societies) are encouraged to participate in the consultation process with a view to developing a reporting regime which achieves HMRC’s objectives while minimising the financial and compliance burden on the sector. For example, can Tax Exempt Savings Policies (‘TESPs’) be scoped out of the reporting regime? Given TESP premiums are limited to £300 per annum the cost of implementing system changes to facilitate reporting seems disproportionate to any benefit to HMRC.
The consultation also proposes the abolition of the requirement for life insurers to have policy terms certified as qualifying by HMRC prior to issue. This has the advantage of enabling insurers to release new QPs to market more rapidly, perhaps at the expense of a lack of certainty over QP status.
Insurers should review the proposals now to identify areas which cause significant issues and feed any concerns into the working group, or HMRC directly. The consultation period finishes on 6 September 2012 following which draft legislation will be issued.