Certain life insurance policies give rise to a UK income tax charge on the occurrence of ‘chargeable events’ (gains) for example on maturity, or death. These gains may accrue over several years. Current rules permit a partial reduction of such gains where the policyholder has been resident outside the UK, but only where the policy was issued by a foreign insurer. New rules in draft Finance Bill 2013 will extend this reduction to policies issued by UK resident insurers:
- on or after 6 April 2013 and
- contracts made before this time which are assigned or varied (so as to increase the benefits secured) on or after 6 April 2013.
This change is welcome and will put all insurers on an equal footing going forward.
Key points include:
Availability of relief
The draft legislation calculates the reduction based on the residence status of the individual liable to tax (usually the beneficial owner) rather than the legal owner as is currently the case. This is a more equitable result, removing the occasionally arbitrary reliance on policyholder residence.
Calculation of the reduction
The provisions currently provide for a continuation of the ‘straight-line’ time apportionment for periods where the beneficial owner of the policy is non resident. This pragmatic approach would be most welcome as it gives relief for non residence without introducing undue levels of complexity for policyholders or insurers. HMRC intend to explore, with Industry, options for an alternative reduction method which more closely links the reduction to economic performance, whilst retaining simplicity. Refinement of the approach could result in complicated calculations; too complicated to expect individuals to compute for their self assessment return.
Temporary non residents
Draft Finance Bill 2013 also contains provisions in respect of statutory residence of individuals. There are a couple of points of note:
In the case of a split year of residence, an individual is not liable to UK tax on any gain accruing in the period of overseas residence.
Where an individual has been temporarily non resident, they may be liable for tax in the year of return for certain gains arising during the period of temporary non residence.
Following provisions in Finance Act 2012 which deny deductions for previous gains on calculation of terminal gains, where the beneficial owner was non resident at the time of the previous gain, there is increased scope for double taxation. HMRC do not propose to give relief from double taxation through the time apportioned reduction; an individual will instead need to claim double tax relief (‘DTR’). In practice claiming DTR, either by treaty or by unilateral credit relief, will in many cases be problematic, for instance a new policyholder may not have details of the amount of foreign tax paid by the previous owner.
The provisions make clear that insurers should continue to report the gross gain on the chargeable events certificate.
HMRC proposed, as part of a consultation on these measures, that a notice be added to policyholder chargeable event certificates advising that for self assessment purposes the gain shown may need to be adjusted in certain circumstances. HMRC confirm, in the consultation response summary, that no such notice will be required. HMRC will instead expand the guidance in the Insurance Policyholder Tax Manual and self-assessment help sheets to explain the complex circumstances where individuals may need to adjust the reported gain for inclusion on their self-assessment return. Expansion of the HMRC guidance is welcome.
Insurers have the opportunity to work with HMRC regarding the appropriate gain reduction methodology and improvements to HMRC guidance.