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Assign of the times

Before turning my attention to the interesting issue of VAT, fees and commission, I thought you had earned a little time off from CP121-related issues so here is your reward. For this, you have got my colleague, David Redfern, to thank.

From time to time, over the years, we have been asked questions connected with the taxation and National Insurance implications of companies either effecting policies for the benefit of their employees or assigning policies to their employees or directors.

Some of you may remember the idea, aimed at minimising income tax and NIC and, at the same time, avoiding capital gains tax on the policy, that involved an employer, an employee, a maximum investment plan and an assignment. The idea was dependent for its commercial validity on the investment performance of the plan and its tax status – usually a qualifying policy providing tax-free “income” or tax-free cash after 10 years.

Avoiding any income tax and NIC along the way was an important requirement, as was avoiding capital gains tax on any policy gains.

Capital gains tax can be due under section 210 Taxation of Chargeable Gains Act 1992 on gains if the plan is owned (when the gain arises) by other than the original beneficial owner who acquired his or her interest for consideration in money or money&#39s worth. Both these tests have to be satisfied for capital gains tax to be due.

The method of avoiding the first test was for the policy to be in the hands of the original beneficial owner when the gain arose and this could be achieved, in the circumstances we are considering, by having the expected eventual owner (the employee) own the policy at outset as the original beneficial owner.

The suggested way to do this but to avoid having to make subsequent investments, for example, by continuing premiums out of income depleted by income tax and NIC, was to have the employee or director effect the plan, pay the first premium and then immediately assign it to the company to “maintain” for the next 10 years. After the 10th anniversary, the plan would be assigned from the company to the employee. Leaving aside any possible use of the golden handshake/termination payment relief – only possible when borne out by the facts of the case – income tax and NIC (since the introduction of anti-avoidance rules) would apply.

But on what value? More on this in a minute. The plan, once assigned, would be back in the ownership of the original beneficial owner (the employee) and the plan, having survived beyond 10 years, would be capable of providing tax-free cash in a lump or, subject to satisfying the various tests to maintain qualifying status, through regular withdrawals.

The plan, by virtue of being owned by the original beneficial owner, would be outside the capital gains tax net. That was the reason behind the first step. So, let us turn back to the value point. We (David, in particular) were asked to research this, and surrounding points, for one of our clients.

Provided that it can demonstrate an insurable interest in the life to be assured, a limited company can, of course, effect a life insurance policy for its own benefit. We have just discussed such a possibility. For example, it may choose to invest some retained profits in a single-premium investment bond or take out a policy to protect against the loss of profits which would otherwise arise on the death of a key employee.

Later, the company may wish to assign legal ownership of the policy to an employee, who would generally be the employee who is the life assured under the policy, for no monetary consideration. In such a situation, it will generally be the case that the employee will be treated as being in receipt of a benefit by reason of his employment. If the employee is a director of the company or higher-paid employee (broadly, one who has emoluments of £8,500 a year or more inclusive of benefits in kind) such a benefit will be subject to income tax under Schedule E.

We have had what we believe to be some very helpful and constructive correspondence with the Inland Revenue on the potentially difficult issue of what is the value of the benefit being conferred when the assignment is made and what are the ensuing tax and NIC consequences. All will be revealed next week.


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