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Gains from policies held on a charitable trust

The Chancellor proposes that, with effect from 9 April 2003, trustees of charitable will only have to pay tax at the basic rate which means that for most UK policies they will currently have no tax to pay.

The background to this change is the chargeable event rules that apply to chargeable events on policies held in trust. The general rule is that such chargeable event gains are taxed on the creator of the trust (settlor) if he/she is alive at some time in the tax year in question and UK resident. The settlor can recover this tax from the trustees.

Where those conditions are not satisfied, gains are assessed on the trustees (if UK resident) at 34% with special rules applying to offshore trusts. It should be noted that income that is taxed under Case VI of Schedule D is not generally exempt from tax under the charitable exemption (in section 505 ICTA 1988).

These rules can become quite difficult to operate in cases where there are a number of donors to a trust.

Most gains made on policies held by trustees of charitable trusts are strictly taxable on the donors to the charity, who are entitled to reclaim any tax they pay from the charity. It is extremely onerous for donors, charities and the Inland Revenue to administer this correctly and may lead to the charity having to bear the equivalent of higher rate tax. Where exceptionally the trustees of the charity are taxable on the gain, they are liable at the rate applicable to trusts (34%).

The proposed revision to the law will have the effect of switching the tax charge on any gain on a life policy from the donor to the trustees of charitable trusts. At the same time, it will reduce the tax chargeable on a gain to tax at the basic rate. As most gains from UK policies are treated as having already suffered basic rate tax the charity will normally have no tax to pay. This brings the treatment of life insurance gains closer to the treatment of the other investment income of charities.


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