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Value Judgements

In the past few weeks, I have been considering the income tax and National Insurance implications when a company effects a life insurance policy on the life of an employee or director and later decides to assign that policy to the employee or director.

We had occasion recently to seek the guidance of the Inland Revenue on the value that is taken into account for tax and National Insurance purposes in such a case.

In the circumstances, we were considering that the assignment was not part of a scheme designed to avoid National Insurance but simply a case of an employer with a policy, which to date had been a keyperson policy, having decided, with the demise of the need for the insurance, to assign the policy to the employee.

The income tax position, as confirmed to us by the Inland Revenue, is that the assignment of the policy would be deemed to be a benefit by reason of employment and would thus be deemed to be an emolument of the employment under section 154(1) ICTA 1988. (All subsequent references are also to ICTA 1988.) This was no surprise to us. The uncertainty was over the amount that would be charged to tax.

The amount of the benefit chargeable to income tax by virtue of the assignment is the cash equivalent, which is defined in section 156(1) as “the cost of the benefit, less so much (if any) of it as is made good by the employee to those providing the benefit”.

Under section 156(3), the cost of the benefit is deemed to be the market value at the time of transfer if the asset “has been used or has depreciated”. In the case under consideration, as would probably be reflected in most cases of this nature, no “making good” by the employee had taken place.

Before proceeding to a resolution of this issue, however, it is important to remember that section 154 only applies to the extent that the cost of the benefit is not otherwise chargeable to tax. The main charging section for Schedule E tax is section 19 and a benefit in kind can be taxed under section 19 if it is capable of being turned into money in the employee&#39s hands.

This means that if the life policy that is assigned has a market value (that is, a surrender value) then it can be turned into money and represents money&#39s worth to that employee to the extent of the surrender value.

This would mean that a charge would arise under section 19. So, it would seem that where the policy being assigned has no surrender value, only section 154 would apply. But, where the policy has a surrender value, both section 19 and 154 could apply. The position under section 154 (see above) is relatively clear but what about policies with a surrender value?

Obvious examples of such a policy would be an endowment maximum investment plan and a single-premium bond. It could also include a unit-linked whole-of-life plan that had been (rightly or wrongly) effected primarily to provide protection benefits but which also had accrued a surrender value, regardless of how small this might be.

I will conclude this analysis, starting with the way the interaction of section 19 and 154 is resolved, next week.

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