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TAXATION OF LIFE POLICIES

Extra-Statutory Concession B53, published on 23 November, is comprised of 3 parts as follows:-



Part 1



This part replaces Statement of Practice 11/80 (SP11/80) from 6 April 1999.


Part 2



Part 2 relaxes from 23 November 1999 the duty of a UK insurer to issue chargeable event certificates in respect of policies owned by non-UK resident policyholders.



Part 3



This part, which takes effect on or after 6 April 1999, modifies the time limits within which an individual who becomes UK resident can vary a pre 17 March 1998 personal portfolio bond so as to keep it out of the new annual charge on deemed gains.



Part 1 in more detail:-



By way of background, under SP 11/80 chargeable event gains are not charged to tax if when the chargeable event occurs:-



the policyholder is UK non-resident;



the policy proceeds are not payable in the UK; and



the policy was issued outside the UK by an offshore company or an overseas branch of a UK life office.



Under the new concession this favourable tax treatment is extended to both UK and non-UK policies, regardless of where the proceeds are payable, but restricted to chargeable event gains which fall to be assessed to tax on an individual or a company. There is one exception to this new rule and this arises where a policy is used by, or held by, a UK branch or agency of a non-UK resident company.



The concession does not extend to the situation where immediately before the happening of a chargeable event:-



(i) a policy is held subject to a trust under which the trustees are non-UK resident for income tax purposes and the person who created the trust is not resident in the UK or is dead, or in the case of a trust created by a company or &#34foreign institution&#34 (see below) that company or institution has come to an end by whatever means (eg. winding up or dissolution); or



(ii) the policy is owned by or held as security for a debt of a &#34foreign institution&#34, which is not UK resident or domiciled. (Foreign institution for this purpose means a company and other entities with a legal personality such as anstalts and stiftungs that may act in a fiduciary capacity in much the same way as a trust).



Where (i) applies, any gains (made under a UK or non-UK policy) will continue to be treated as income of the trustees for the tax year in which the chargeable event occurs for the purposes of section 740 ICTA 1988. The effect of this is that the gains are added to the pool of trust income available for distribution and attribution to UK ordinarily resident beneficiaries who receive payments out of the trust. This means that, to the extent there is undistributed income in the trust, such payments would be treated as income and assessed to tax on the beneficiary under Case VI Schedule D in the tax year of receipt.



Where (ii) applies and chargeable gains arise under such policies they will continue to be attributed to UK ordinarily resident individuals receiving a benefit from a foreign institution and taxed on the basis outlined in the preceding paragraph.



Under the concession, the Inland Revenue will not seek tax where an individual or company is not resident in the UK at any time during the tax year (beginning with tax year 1999/2000) or accounting period (beginning with accounting periods which begin after 5 April 1999) respectively in which the chargeable event occurs.



Part 2 in more detail:-



UK insurers are under a statutory duty to broadly ensure the Inland Revenue is provided with certain information when a chargeable event occurs under a policy issued by it or an overseas branch. This information is usually given in a chargeable event certificate. For this purpose, the country of residence of the policyholder is not relevant.



ESC-B53 eases this duty of the insurer. Information will not need to be provided by the insurer where a policyholder is non-UK resident during the tax year (for individuals and trustees) and accounting period (for companies) in which the chargeable event occurs provided that:-



– information about the gain, or the sum payable or other benefits that accrued on the happening of the chargeable event, has been provided to the fiscal authorities of the country in which the policyholder is resident or, for branch business, the country in which the branch is situated; or



– the policy represents branch business and the liabilities of the branch under its policies to UK residents and British citizens is less than 50% of its total liabilities.



In assessing whether information should be supplied, the insurer must act to the best of its knowledge and belief having regard to all of the information in its possession. To police matters the Inland Revenue may carry out audits.



The new rule is effective from 23 November 1999 and applies to information due under the statutory duty which is outstanding at that date.



Part 3 in more detail:-



Briefly, a policyholder who has a pre 17 March 1998 personal portfolio bond (whose benefits have not been increased or term extended after 15 July 1998) which can be invested in “highly personalised assets” can, subject to the satisfaction of certain conditions, vary the policy so it can only be invested in “non-highly personalised assets”. For a UK resident policyholder such variation must take place before the end of the first policy year commencing after 5 April 1999. The effect of the variation will be to take the policy out of the new tax charge.



Before the introduction of ESC-B53, a policyholder who was non-UK resident on 17 March 1998 had to vary his policy by the end of the first policy year that commenced in the tax year the policyholder becomes UK resident (if this period is longer than under the general rules).



This was because, in the Taxes Act, there is no provision to split tax years in relation to residence and an individual who becomes resident in the UK during a tax year is taxed as a resident for the whole year. In an extreme case this could mean that a policyholder has little time within which to make the variation. For example, if a policyholder becomes resident in the UK on 30 March 2001, and his policy has a commencement date of 9 April then he would have to vary his policy by no later than 8 April 2001 ie. within 9 days. This compares unfavourably with a policyholder who was UK resident on 17 March 1998 with an identical policy who would have at least a full year within which to make the variation.



As a result of this anomaly, where an individual comes to the UK to take up permanent residence or to stay for at least two years, the date he first arrives in the UK to take up permanent residence or to stay will fix the policy year by the end of which he has to make the variation. In other words, he can make the variation at any time up to the end of the first policy year which begins after he first arrives to become UK resident. Applying this new rule to the above example would mean that the variation could be made up to 8 April 2002.

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