In Budget 2012 the Chancellor announced the Government’s decision to restrict the tax relief available for qualifying life insurance policies (‘QPs’). For policies incepted on or after 6 April 2013, premiums will be restricted to £3,600 in any 12 month period. This limit will apply across all policies beneficially owned by an individual.
HMRC have consulted on the new limit and its practical implications. HMRC appear to have listened to the concerns of Industry and sought to address these, where possible, without undermining the effectiveness of the £3,600 cap. Legislation is included in the draft Finance Bill 2013, published on 11 December. The provisions are complex and will take time to digest fully, particularly the transition.
There is a balance to be struck between retaining the flexibility of the current QP regime and adding complexity due to the need to obtain repeated statutory declarations. For example, policies may still be written in trust or assigned in certain circumstances with no loss of qualifying status. A detailed review of these complex rules is required to ascertain if the balance is appropriate. Insurers should consider the detailed provisions in light of their own products.
Headline comments include:
For policies issued on or after 6 April 2013, all rights must be beneficially owned by one or more individuals in order to be qualifying. Where there are multiple beneficiaries premiums payable under the policy will count in full towards each beneficial owner’s premium limit.
Where a policy is held on non-charitable trust and no individual is the beneficial owner, an individual, the settlor, is treated as the beneficiary of the policy. This should address the desire by Industry to retain the flexibility to write products in trust.
Assignment of any rights under a QP on or after 6 April 2013 will result in loss of QP status, unless the assignment is permitted. Permitted assignments include those:
- in relation to security for, or the discharge of, a secured debt of the individual
- between spouses or civil partners
- to an individual in pursuance of an order made by a Court
- by the settlor on creation of a trust
To maintain QP status, the insurer must obtain a statutory declaration from the beneficiary, broadly, within 3 months of the permitted assignment. This could be problematic for insurers. The nature of the declaration is to be set out in regulations.
Broadly, a protected policy is one that was issued before 21 March 2012, but it can be brought within the premium limit if varied sufficiently. The limit does not apply to variations of policies with the sole purpose of ensuring that the borrower under an interest-only mortgage will have sufficient funds to repay the principal. This is a welcome change and should partially ease Industry concerns regarding the back book.
Pure protection policies
It still appears possible to write protection policies as QPs without the premiums counting towards the £3,600 cap. This pragmatic approach avoids the need for a significant rewrite of Schedule 15 whilst maintaining QP protection for such policies in the unlikely event that a gain may arise, say on assignment.
Insurers will be required to report information annually to HMRC in respect of QPs, so that HMRC can monitor compliance with the new limit. The detail of this new reporting regime is to be introduced by regulation.
In the summary of consultation responses HMRC confirm they will no longer certify QP status. This is a welcome development as it removes the expense of cumbersome administration for minor QP changes.