Clause 24 - Gains from contracts for life insurance etc

Finance Bill – in a Public Bill Committee am 3:00 pm ar 21 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss that schedule 8 be the Eighth schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Clause 24 introduces schedule 8, which amends the rules for time-apportioned reductions from gains made on life insurance policies for periods where the policyholder is resident outside the UK. The rules are known as the chargeable event gain regime.

Under chapter 9 of part 4 of the Income Tax (Trading and Other Income) Act 2005, time-apportioned reductions are provided only for life insurance policies issued by a foreign insurer. Clause 24 and schedule 8 would change that so that time-apportioned reductions were extended to life insurance policies issued by UK insurers.

Chargeable event gains arise if a policyholder makes withdrawals or receives cash or other benefits on a full surrender, part surrender, maturity or death, from a life insurance policy, life annuity or capital redemption policy; or if he sells or assigns the whole or part of a life  insurance policy, life annuity or capital redemption policy, including as part of arrangements on divorce or separation; or if the ownership of a policy or part of a policy changes hands for money or money’s worth; or if the policyholder holds a Personal Portfolio Bond with an insurer in the year; or if any of the other things have been done by a trustee of a trust that the policyholder created or contributed to, the trustees of a bare trust of which the policyholder is a beneficiary, anybody holding a policy in their own name as the policyholder’s nominee or a lender to whom the policyholder’s policy was previously assigned as security for a debt.

Those gains are taxable as income and included in income for all purposes, including entitlement to personal allowances and tax credits. Provision is made within the chargeable event gain regime to ensure that chargeable event gains arising on policies issued by foreign insurers are reduced in proportion to the policyholder’s period of residence outside the UK at any time during the life of the policy. These are known as time-apportioned reductions and broadly mean that gains accruing during an individual’s period of residence outside the UK are excluded from the charge to UK tax.

Time-apportioned reductions are currently not available to policies issued by UK insurers, even though individuals with such policies may also have periods of residence outside the UK. The tax information and impact note states that the change is expected

“to impact on a relatively small number of individuals who have periods of residence outside the UK during their ownership of a life insurance policy”.

Obviously, schedule 8 relates to taxable gains arising on the life insurance policies held by individuals who are non-UK resident for some of the time during the prescribed period. Currently, certain life insurance policies or capital redemption policies issued by a UK non-resident company or forming part of an overseas life insurance business of a UK insurer, are defined as foreign policies and some aspects of the tax treatment are therefore different from policies issued by UK insurers.

One example of different treatment is that the gain on a foreign policy would be reduced if the policyholder was not UK-resident throughout the entire prescribed period. As I understand it, and as I am sure the Minister will confirm, the clause is intended to apply to new UK policies or variations of existing UK policies where the owner of the policy is resident outside the UK during the policy ownership period.

I would be grateful if the Minister would confirm my understanding of the change that is being introduced. Would it have been desirable for the change to have applied to all existing UK policies? How many policyholders who reside abroad are likely to be impacted by the change? What is the typical period for relevant policyholders who are affected by the change? What will be the cost or yield to the Exchequer of schedule 8? The Exchequer impact is assessed as being negligible, but it would be useful if the Minister could confirm that there would be no additional yield to the Exchequer.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 24 introduces schedule 8, which makes changes to ensure that there is greater alignment between the treatment of policies issued by insurers inside and outside the UK, and that the rules on time-apportioned reductions provide a more appropriate reduction to chargeable event gains.

It might be helpful if I set out a little bit of background to the measure, which was announced at Budget 2012. Special rules, which are referred to as the chargeable event gain regime, apply income tax to investment profits that individuals realise from life insurance policies. Under the current regime, chargeable event gains arising on policies issued by foreign insurers are reduced in proportion to a policyholder’s period of residence outside the UK at any time during the life of the policy, a process known as a time-apportioned reduction. Broadly, that means that gains accruing during an individual’s period of residence outside the UK are excluded from the charge to UK tax. Time-apportioned reductions are currently not available to policies issued by UK, as opposed to foreign, insurers, even though individuals with such policies may also have periods of residence outside the United Kingdom. In addition, the amount of the reduction under the current rules may be inappropriate in some circumstances. For example, relief is given by reference to the residence history of the legal owner of the policy rather than to that of the person liable to income tax on the gains, who is generally the beneficial owner.

Clause 24 and schedule 8 extend time-apportioned reductions to life insurance policies issued by UK insurers. The clause and schedule provide that time-apportioned reductions will be calculated by reference to the residence history of the person liable to income tax on the gains, not by reference to the residence history of the legal owner of the policy.

A formal consultation was launched in the summer of 2012, and the possibility of amending the simple formula currently used to calculate the allowable reductions for periods of non-residence was discussed. The aim of those discussions was to tie the calculation more closely to the dates of premium payments and the values of sums invested at particular dates. A number of different methodologies were considered, but the improved accuracy was far outweighed by the complexity of the calculation that the taxpayer would be required to carry out, so the existing simple formula remains in place.

The hon. Member for Newcastle upon Tyne North asked about the impact. As she correctly said, the tax information impact note states that there is a negligible impact on the Exchequer, which means that the measure will result in neither a significant cost nor a significant yield. She also asked about the number of people who are likely to be affected. She will be aware that the proposed changes are expected to impact on a relatively small number of individuals who have periods of residence outside the UK during their ownership of a life insurance policy. It is difficult to be specific about that and go beyond what the TIIN states, but we are probably talking about a few thousand.

The hon. Lady also made the point that it is desirable for the change to apply to all UK policyholders. I would agree with that; the measure supports the Government’s objective of ensuring that our tax system is fair by aligning the treatment of policies issued by UK and non-UK insurers. I hope that that is helpful to her.

This measure is about promoting fairness in the tax system by levelling the playing field so that UK insurers and those insurers outside the UK are treated in the same way. It provides a more appropriate calculation methodology, based on the residence history of the person paying tax on the life insurance policy gain. I hope that the clause will have the support of the Committee and may stand part of the Bill.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.

Schedule 8 agreed to.