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Removing the tax charge on certain group life policies

A group life policy is one that insures the lives of a group of individuals and pays benefits on each death. Multiple payments of death benefits can lead to unintended charges to tax on either the lives insured or the policyholder.

This is because a policy which can pay benefits on the death of more than one individual will not be a qualifying policy. Whilst the first death will give rise to a chargeable event, in the case of protection policies the policy is unlikely to have a substantial value immediately before death and so no chargeable event gain will arise. However, on deaths after the first, it is necessary to take into account any &#34relevant capital payments&#34 under the policy. This will include previous payments made on death (but not disability). Consequently, on deaths after the first, an increasing chargeable event gain will arise even though the policy had no investment value.

The Government have now announced that from 9 April 2003

(i) there will be no tax charge on death benefits paid under group life protection policies so long as they meet certain conditions. It gives insurers and policyholders until 5 April 2004 to vary existing policies that do not meet all of the conditions in order to bring them within the exemption as from 9 April 2003.

(ii) all tax charges which arose before 9 April 2003 as a result of gains on group policies will be removed retrospectively.

The retrospective relief that this measure offers will apply to all group life policies whether or not they meet the conditions necessary for exemption in the future. This will wipe out the tax charge on all past gains. Apparently, insurers have reported very few, if any, such gains. Any person who has paid tax on a gain arising in connection with a benefit received under a group life policy may be entitled to a repayment of that tax. The Inland Revenue advice is that a person who considers that he or she has paid income tax should contact the tax office dealing with their tax affairs in the first instance.

This proposed revision will remove the tax charge that could arise on or after 9 April 2003 today when benefits are paid on second and subsequent deaths, provided that the policies in question meet certain conditions. One of the conditions is that the only benefits which may be paid under the policy are death benefits, so policies which have a surrender or maturity value do not fall within this measure. The conditions are necessary to prevent products with an investment content being used for avoidance.

Any group life policy in existence at 9 April 2003, which does not meet the conditions, may still benefit immediately from the new measure provided its terms are changed to meet all of the conditions by 5 April 2004. This will apply only if no benefits under the policy other than death or disability benefits are paid out from and including 9 April 2003. Then the policy will be treated as having met the conditions from 9 April 2003, ensuring that any death or disability benefits which are paid between 9 April 2003 and the date of change are not taxed.

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