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TAXATION OF LIFE POLICIES

On 18 October 1999 the Inland Revenue issued a press release announcing certain changes to the regulation of overseas life assurance business (OLAB). These changes are set out in the Insurance Companies (Overseas Life Assurance Business (Compliance) (Amendment) Regulations 1999. These regulations will make it easier for life insurance companies operating in the UK to sell policies abroad.



The regulations should be welcomed by UK insurers. They are the result of consultation with the life assurance industry and will help companies operating in the UK to exploit demand for life assurance products overseas, especially elsewhere in Europe. The industry sees considerable scope for expansion in certain overseas markets and these regulations will remove some of the tax obstacles that currently make products sold by UK companies unattractive to foreign customers.



The regulations relax the conditions that must be met for policies sold to foreign customers to qualify as OLAB, and so receive the tax treatment appropriate to business with policyholders who are not UK resident taxpayers. In particular, the administrative burdens and the requirements for foreign policyholders to make detailed declarations are significantly reduced.



Parts of the new regulations relate to relaxation for policyholders and companies of the need to make certain declarations and sign certificates.



Normally OLAB tax treatment is more beneficial for both companies and policyholders than the treatment under the normal rules for UK policyholders investing in non-OLAB funds. This is of course because UK policyholders will be investing in taxed funds where tax will be levied on the I – E basis. OLAB policyholders will be investing in a gross fund.



However, there may be situations where it is better for a non-UK resident policyholder to invest in a taxed fund and one of these could be where a term assurance policy is involved. The ability to write term assurance in a taxed fund will mean that a negative I – E can be produced which can be set off against other investment gains in that taxed fund. It will also be the case that the premium rates for term policies will frequently be lower in respect of policies written in a taxed fund than those written in an OLAB fund.



Currently, under the OLAB regulations, if the certification rules are not complied with, the OLAB business must be transferred into the taxed fund. It would appear that the Inland Revenue are concerned that in certain cases the certification rules are deliberately not being complied with so that term assurance business must then be written in the UK taxed fund which would benefit both the policyholder and the company and, of course, prejudice the Inland Revenue in terms of a lower tax take on that fund.



Amendments to the regulations have been made to ensure that this practice cannot continue. In other words, it will not be possible for a term assurance policy to be written in a taxed UK fund merely because the OLAB certification rules have not been complied with. The basic rule in the amending regulations is that the new treatment for term assurance policies applies to contracts made on or after 8 November 1999. However, a life assurance may elect to defer this start date to its first accounting period starting on or after 1 October 1999.



The impact of this may be that OLAB insurers may no longer have a competitive term assurance policy when compared with genuine offshore insurance companies and local life offices. They will no longer be able to use the lower rates attributable to the taxed UK fund which may previously have given them a marketing edge over the offshore and local life insurance policies available.


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