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The NIC of time

In this last article on the intriguing (well, at least to me) subject of income tax and National Insurance contributions on the assignment of a policy from an employer to an employee, I will look at the interaction of sections 19 and 154 of ICTA 1988. As you will see, together they conspire to catch the taxpayer, regardless of the circumstances, usually resulting in the biggest possible tax take for the Inland Revenue.

You will recall (or, at least, you ought to if you were paying attention last week – now sit up straight and listen) that section 19 operates where the policy being transferred has a money&#39s worth value, that is, a surrender value, and section 154 when the policy has no value. Sometimes (no surprises here) they could both operate. The interaction of sections 19 and 154 can be illustrated by the following examples:

•A single-premium investment bond with an initial premium of £10,000 and a surrender value of £11,125 at the time of assignment. The income tax charge would be based on the money&#39s worth (surrender value) of £11,125 under section 19.

•A term insurance policy with a nil surrender value on assignment under which the employer has paid premiums of £720. As there is no money&#39s worth to be charged, the amount assessed is the cost of providing the benefit to the employer, which is £720 to be assessed to tax under section 154. The Inland Revenue does not consider that a market valuation under section 156(3) (applied where the asset has been used or depreciated) would be applicable to policies of life insurance.

•A whole-of-life policy under which the employer has paid £5,000 in premiums and is assigned when it has a surrender value of £1,000. The sum of £1,000 is assessed as money&#39s worth under section 19 and the adjusted cost of £4,000 (that is, the cost to the employer of £5,000 less the charge on £1,000 under section 19) is taxed under section 154.

In summary, the charge to tax under Schedule E (albeit under one or a combination of two legislative provisions) is effectively on the greater of market value at the time of assignment and the cost to the employer.

National Insurance contributions also need to be considered in connection with the assignment of a life policy to an employee. Such an assignment does not give rise to earnings for NIC purposes but is treated as a payment in kind. With certain exceptions, payments in kind are not within the Class 1 NIC charge. For life insurance policies, however, a key exception is where a beneficial interest is conferred in a contract which falls within Class 1 (life and annuity business), Class III (linked long-term business) or Class VI (capital redemption business) in Schedule 1 to the Insurance Companies Act 1982. In such circumstances the Class 1 NIC charge is based on the value of the beneficial interest at the time it is conferred, which would be the market value (that is, the surrender value of a contract which falls within Class I, III or VI as outlined above).

In the first and third examples above, the NIC charge would be based on £11,125 and £1,000 respectively. Under the second example, the NIC charge would be nil as the policy has no surrender value. A Class IA NIC charge would not be relevant as, in all three examples, value has been brought into charge to Class I contributions even though, in the second example, no NICs are actually payable.

In considering the tax implications of an assignment of a life policy to an employee, if the assignment confers a benefit by reason of employment, it will constitute an assignment for consideration which may give rise to a chargeable event, with any chargeable event gain being assessed to tax on the company. However, it is unlikely that any gain would be subject to tax on the company as such a gain is left out of account to the extent it is otherwise subject to income tax on the employee.

The life policy will also now be a secondhand policy as it will, in most cases, be owned by a person (the employee or director) who is other than the original beneficial owner who, based on the by reason of employment rule, will have acquired their interest for consideration in money&#39s worth. Whether any capital gains tax is due when a gain is made under the policy within the CGT legislation will depend on the nature of the policy. Where it is a non-qualifying policy, any gains made will be subject to income tax, which takes priority over any CGT charge.

As a throwaway on the interaction of income tax and CGT in relation to life insurance policies, it is worth remembering that, generally speaking, a life policy is not subject to CGT but a policyholder does, in an indirect way, secure the benefit of indexation relief.

This relief was abolished from April 6, 1998 for individuals and trustees but remains for companies including life companies. The life company should take this into account in determining the impact of tax on fund pricing. The policyholder should see the benefit of this in the shape of a smaller reduction in unit value to take account of taxation.


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