As we know, there are to be wholesale changes to the corporate tax regime for life insurance companies, with effect from 1 January 2013. We commented on the operational impact of these changes in our recent article “10 steps in to the new life tax regime”.
Budget Day saw the publication of revised anti-avoidance provisions covering the transition. These are now better targeted and have a start date of 21 March 2012. Also welcome is that HMRC now has the power to give clearance to a taxpayer that they will not apply the provision in appropriate circumstances.
The legislation governing the new regime will form part of Finance Bill 2012, to be issued on 29 March 2012, hopefully along with the associated regulations. We will be issuing a mailing following Finance Bill day.
There are three key measures – two anti-avoidance and one aimed at limiting the tax relief available on qualifying policies.
Qualifying policy: restriction on permitted premiums
An annual premium cap of £3,600 has been introduced for qualifying life insurance policies. Such policies have historically been attractive to higher or additional rate taxpayers since the investment return suffers income tax only at the basic rate of tax. The cap is consistent with the Government’s intention to reduce the spectrum of benefits available to high net worth individuals, but the change potentially means the loss of valuable customers for life insurers and taints the attractiveness of life insurance as a form of investment.
This, coupled with the pension changes introduced by Finance Act 2011 and the Retail Distribution Review, present significant product development challenges for the sector.
Calculation of chargeable event gains - Restriction in deduction for previous gains
This is a long-awaited anti-avoidance measure in light of the judgement in Mayes where the Courts felt unable to ignore the “prescriptive” rules which taxed part and final surrenders.
When calculating a chargeable event gain, this provision will limit the previous gains that may be deducted.
Clusters of life policies
This change means that, in certain circumstances, a cluster of life policies will be considered to be a single contract for the purposes of the chargeable events legislation.
We would not expect this measure to apply to the majority of cluster products provided the policies are written on comparable terms and the benefits offered by each policy not only are comparable across the policies but are commercial, which is ordinarily the case.