So the Government has decided not to legislate any of the three options presented in the consultation on the taxation of part surrenders and assignments under life insurance policies.
Instead, it will accept an alternative proposal put forward by the industry. This would allow the small number of policyholders that inadvertently generate a “wholly disproportionate” gain to apply to HM Revenue & Customs to have the gain recalculated on a “just and reasonable” basis.
To its credit, the Government clearly remains committed to providing a remedy for the handful of people that find themselves in that position. Importantly, though, it is also reluctant to introduce wholesale changes to a system that generally works well.
The new suggestion delivers the policy aim of removing disproportionate gains, while avoiding a change to the tax rules for the vast majority of policyholders and will not generate any inappropriate costs for the industry.
Revised legislation for this remedy has been published, for further comment, following the Autumn Statement. It forms part of the Finance Bill 2017 and will come into effect from 6 April. Detailed guidance will be published prior to the remedy becoming available, according to HMRC.
The Government has stated it will closely monitor the effect of this change. So what do the clauses implementing it look like? Well, in relation to disproportionate gains arising when a part surrender or part assignment for money or money’s worth takes place, section 507 ITTOIA 2005 is amended specifying a recalculation of gains under that section. The explanatory notes read like this:
“Section 507A ITTOIA 2005: Recalculating gains under section 507
Subsection 1 allows a person who has made a part surrender or part assignment of a life insurance policy which gives rise to a gain under section 507 to apply to an officer of HMRC to have the gain reviewed if they consider that it is wholly disproportionate.
Subsection 2 requires that applications under subsection (1) must be made in writing and received by an officer of HMRC within two years after the end of the insurance year in which the gain under section 507 arose. A longer period may be allowed if the officer agrees.
Subsection 3 provides that if the officer considers the gain arising under section 507 is wholly disproportionate then the gain must be recalculated on a just and reasonable basis.
Subsection 4 ensures that following a recalculation under subsection (3) all references to a gain under section 507 in Chapter 9 of ITTOIA 2005 (excluding this section) should be regarded as references to the gain as recalculated under this subsection.
Subsection 5 instructs an officer of HMRC to notify the applicant of the result of the recalculation of the gain.”
The background note to the amendments reaffirms the sentiments and specific comments/observations expressed in the consultation responses. They are reproduced here:
“At Budget 2016 the Government announced its intention to change the tax rules for part surrenders and part assignments of life insurance policies to ensure that wholly disproportionate gains were no longer charged to tax. This was to provide a fairer outcome for those policyholders that inadvertently generated such gains. A consultation on possible options for change was held from 20 April to 13 July 2016.
“Following consultation, the Government decided to introduce legislation to retain the existing tax rules for part surrenders and part assignments but allow policyholders who had inadvertently triggered a disproportionate gain to apply to an officer of HMRC to have their gain recalculated on a just and reasonable basis. This legislation is expected to have limited application as it is considered that wholly disproportionate gains will arise very infrequently.”
We appear to have arrived at an eminently sensible, fair and practical solution to the problem of disproportionately large chargeable event gains on part surrenders and assignments. Refreshing.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn