On 13 August 2012 HMRC published a consultative document entitled “Life Insurance – Time Apportioned Reductions”.
The key aspects of the proposals are:
- A levelling of the playing field between UK and overseas insurers
- Refinement of the calculation of the relief for non UK residence.
- A ‘disclaimer’ to be included on chargeable event certificates
In our view, the approach follows the recent trend of tightening the rules around life policy taxation to bring tax relief given into line with Parliament’s intention. The proposed changes seem fair; however, it is probable that achieving a more equitable result will come at the expense of simplicity in the calculation and therefore the change may prove burdensome to policyholders (and their advisers) who wish to take advantage of the relief.
- Revised gain calculation
The current method of calculating the relief (application of a ‘non-resident’ fraction to the whole gain) treats gains as accruing evenly over the life of the policy. Depending on the fact pattern, relief may therefore be greater than the gains accruing whilst the policyholder was non-resident. HMRC noted that this is “widely marketed as a tax advantage” and are requesting suggestions for a fairer method of calculating the relief.
- Changes to the availability of the relief
HMRC proposes to base the relief on the residence history of the beneficial owner of the policy, rather than the legal owner, as is currently the case. Further, where the policy has changed hands, relief will be limited to the period of the current beneficial owner’s residence history.
Currently reduction of gains for periods of non UK residence is only available where the policy is issued by a foreign insurer. HMRC propose to extend the scope of the relief to policies issued by UK insurers.
- Interaction with other provisions
- Relief for Double Taxation: HMRC has noted that the anti-avoidance provision contained in Finance Act 2012 which denies deductions for previous gains on calculation of terminal gains, where the beneficial owner was non resident at the time of the previous gain [http://www.kpmg.com/UK/en/WhatWeDo/Tax/chancellor-budget-2012/Documents/life-insurance-budget.HTML] may result in double taxation of life policy gains in certain unusual situations. HMRC are consulting on potential ways of giving relief from double taxation in these scenarios.
- Consultation on statutory definition of residence for individuals: This is currently the subject of a separate consultation. Anti-avoidance provisions for “temporary non-residence” are proposed under the new statutory definition of residence. Views are requested as to the interaction of this anti-avoidance rule with the relief for chargeable event gains for periods spent abroad.
- Insurer’s reporting obligations
HMRC are proposing that a new notice be added to chargeable events certificates sent to policyholders advising that for self assessment purposes the gain shown will need to be adjusted in certain unusual situations. HMRC intends to provide new guidance to policyholders to limit the potential for confusion arising from the change. Comments are requested from insurers as to what form this guidance should take.
Insurers should review the proposals and feed any concerns to the appropriate trade body or directly to HMRC. The consultation closes on 5 November 2012 and draft legislation will be included in Finance Bill 2013.
If you would like to discuss matters raised in this article please contact your usual KPMG contact Louise McCarroll 0131 527 6789 or Nancy Walker 0131 527 6657.