Clause 25 - Qualifying insurance policies

Finance Bill – in a Public Bill Committee am 3:30 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 9 be the Ninth schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

As far as I understand it, the clause introduces schedule 9, which provides for the implementation of a new annual premium limit on qualifying life insurance policies, which I shall refer to as QPs—I am sure that the Minister will be grateful for that abbreviation. The QP regime was introduced in 1968 to preserve pre-existing tax treatment for traditional moderate-value, long-term, regular premium savings policies that contain a significant element of life insurance. No upper limit was set for the investment premiums that could be paid into a QP, which allowed individuals to obtain unlimited relief from higher rates of income tax.

QPs are essentially regular premium life policies that run for 10 years or more and have an investment, such as endowments or whole life with profits. Term policies that pay a fixed sum if a person dies within a fixed period of years, but have no investment value, also usually qualify.

In Budget 2012, the Government announced their intention to restrict the tax relief available for QPs from 6 April 2013, limiting to £3,600 the premium for new QPs taken out by any individual if the maturity proceeds are to qualify for tax-free status. Policies taken out before 21 March 2012 are not affected, but some transitional arrangements have been put in place for policies taken out from that date to forestall people who might have tried to take advantage of the old rules before the new rules became clear.

The measure was consulted on in June 2012 and the summary of the responses published suggested that the following key concerns had been raised:

“There are likely to be significant implementation costs to industry from a reporting system both for policies taken out before 21 March 2012 and those taken out on or after that date, disproportionate to the protection of Exchequer receipts being sought by the Government. There are concerns about the extent to which policies taken out before 21 March 2012 are brought into the new annual premium limit regime” and

“The proposed changes add complexity to an already complicated area of tax law.”

Further concerns about the impact of the changes on inheritance tax planning have been raised:

“Since the special tax regime for qualifying policies was introduced in 1968, it has given them important advantages for tax planning, and IHT in particular when written in Trust. This may have a significant effect on some traditional IHT planning arrangements. For example many policies were taken out in the 1970s -1990s and placed in Trust to build up a fund to meet IHT on the death of the survivor of a married couple. Back to back annuities were another example. These may be less popular nowadays as investment returns on traditional policies have declined with interest rates, but they still have a place in tax planning.”

The tax information and impact note states that the measure is expected to have a negligible impact on the Exchequer, and will

“impact a relatively small number of individuals and households who would have used such arrangements for higher value investment. It is expected that there will be no impact on individuals making regular moderate value investments for which premiums payable will not exceed the limit.”

In 2010, 30 life insurers and 12 friendly societies were known to sell QPs.

I have a general point to make. That reference to a relatively small number of individuals is relative to what? Some clarification would be helpful. I also have a few queries that arise not only from the concerns raised in the consultation but from some of the statements in the impact note. It would be helpful if the Minister could explain in layman’s terms how the annual premium limit will work in practice and which life insurance policies will be deemed qualifying life insurance policies. It was helpful that the Minister sought to quantify the relatively small number of households that will be affected in his comments on the previous clause. If he could do the same here, it would provide some reassurance.

Does the Minister think these changes will have an impact on the propensity of individuals to save in their policies on a regular basis? Are life insurance policies becoming a less fashionable form of savings these days? Could he also explain the rationale for the difference between the ISA tax-free allowance, which is around £5,800, and the tax relief on premium limits set in this schedule, which is £3,600? I have one final comment on the impact on business, including civil society organisations, which are mentioned in the impact note. The measure is expected to have an impact on those 30 life insurers and 12 friendly societies which the Government were aware of in 2010. It says that the final number of businesses affected and the impact of this change on them cannot be quantified at this stage and that it is expected that there will be an increase in administrative burdens and a one-off cost to businesses as they familiarise themselves with this policy change. Greater clarity on those impacts and associated costs would be helpful.

Photo of David Gauke David Gauke The Exchequer Secretary

The clause introduces schedule 9, which makes changes to introduce an annual premium limit of £3,600 for qualifying insurance policies from 6 April 2013. That will improve fairness in the tax system by ending unlimited relief from higher and additional rates of tax being granted on premiums to life insurance policies.

The qualifying policy regime was introduced in 1968 to preserve pre-existing tax treatment for traditional, moderate-value, long-term, regular premium savings policies that contain a significant element of life insurance. No upper limit was set for the investment premiums  that could be paid into a QP, which allowed individuals to obtain unlimited relief from higher rates of income tax. The Government announced in Budget 2012 a restriction to the tax relief available for QPs, which supports our objective of promoting fairness in the tax system by ensuring that tax reliefs for QPs are correctly targeted.

The clause and schedule provide for the implementation of a new annual premium limit on QPs. For policies issued on or after 6 April 2013, the amount of premiums payable into QPs for an individual will be limited to no more than £3,600 in any 12-month period. For policies issued on or after 21 March 2012, but before 6 April 2013, transitional rules will apply. Relief for policies issued in that period will be restricted. Full relief is available in relation to premiums payable or treated as payable in the transitional period; however, for those policies the £3,600 annual limit will apply to premiums payable on or after 6 April 2013.

Photo of David Gauke David Gauke The Exchequer Secretary

I will, but with some trepidation.

Photo of Mike Thornton Mike Thornton Democratiaid Rhyddfrydol, Eastleigh

This is a purely technical question—[Hon. Members: “So was the last one.”] I am a Lib Dem—what can I say?

Do these measures apply to single premium policies, commonly called bonds? A lot of those policies are used to supply money for people for their old-age care, an issue that we are all concerned about on both sides of the House, and to fund care home fees later in life. I have no objection to any of these measures for most policies, but for those particular policies it might restrict people’s ability to save money for care home fees.

Photo of David Gauke David Gauke The Exchequer Secretary

I am always nervous when someone stands up and says that they will make a purely technical point, but the point is perfectly fair. It is worth mentioning that there are some exclusions to the rules: for example, pure protection policies are excluded, unless they are varied so that they are no longer pure protection policies; that covers those policies that have no surrender value or are not capable of acquiring a surrender value, or under which the benefits payable cannot exceed the amount of premiums payable except on death or disability. I will come back to the specific cases that the hon. Gentleman raised later in my remarks.

Policies issued before the transitional rules came into effect will be affected by the new rules only where on or after 21 March 2012 there is a substitution of a new policy for an existing policy or a variation of an existing policy, or the exercise of an option within an existing policy, that results in a major change—such as, for example, the extension of the premium-paying term or an increase in premiums payable. The tax treatment of policies issued before 21 March 2012 that are not altered on or after 21 March will remain unchanged.

A formal consultation was launched in summer 2012, to which 19 responses were received, including from representative bodies for insurance companies, friendly societies and mutual societies; HMRC also held a number of meetings with businesses, representative bodies and professional firms.

During the consultation, industry suggested that existing policies issued before 21 March 2012, often referred to as the back book, should be excluded from the new rules. The Government have listened to those representations and agreed that back book policies will be brought within the new annual premium limit only if they are altered in a substantial way. Additionally, to lessen any administrative burden on the industry arising from the introduction of the annual premium limit, insurers will not be required to provide reports on back book or transitional period policies to HMRC.

Industry also suggested a number of different types of policy that should be excluded from the new annual premium limit. The Government have excluded pure protection policies, and I have run through that issue. We have excluded mortgage endowment policies issued before 21 March 2012, when the alterations to the policy are made only to ensure that the policy enables repayment of the relevant mortgage capital. Exempting those policies will avoid unduly harsh repercussions for policy holders whose investments had not performed as expected and who will either have to increase premiums above the cap to meet the target of repaying their mortgage or run the risk of losing their property.

The schedule grants powers to HMRC to make regulations providing for statements from individuals to support qualifying policy status for new or continuing policies issued or amended on or after 6 April 2013, and reporting requirements for insurance providers in respect of qualifying policies issued on or after 6 April 2013. Draft regulations were published for consultation on 31 January 2013, and the consultation closed on 28 February 2013. The detail of the regulations is still under discussion with the working group drawn from the industry and the accountancy profession, the aims for the regulations to be made when Royal Assent is given to the Finance (No. 2) Bill 2013.

Let me deal with some of the issues raised in the debate. The QP relief applies to all individuals, in addition to existing savings vehicles. The majority of policyholders will be unaffected by the £3,600 premium limit. I was asked how many will be affected. The impact assessment says that relatively few will be affected, and the hon. Member for Newcastle upon Tyne North asked “relative to what?” I could say that it was relative to the 2.7 million people who have been taken out of income tax by the Government or the 25 million people who have seen a reduction in their basic rate of income tax but, to be more precise and using FSA statistics, in 2010, of the 420,922 QPs that were issued, only 7,907 policies will be affected by the limit.

Concern was expressed about whether there would be an increased administrative burden for industry. The Government acknowledge that there is an increased administrative burden, but we believe that it is commensurate with the overall aim of the measure, which is to increase fairness in the tax system. We have done our utmost to limit the impact of the burden. For example, there has been wide consultation with the industry.

As for friendly societies, again we have consulted closely.

Photo of David Gauke David Gauke The Exchequer Secretary

Let me finish my point about friendly societies. The measure does include additional information obligations for providers when policies are first issued. Broadly, discussions with the industry suggest that the additional requirements are unlikely to be burdensome, although we acknowledge that they might have a greater impact on a small number of friendly societies that do not routinely provide information to HMRC on life policies.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

My question relates to an earlier point that the Minister made. Unfortunately, I do not have my Red Book immediately to hand. However, bearing in mind the doubts expressed in the consultation about whether the proposed change would bring in sufficient revenue to justify the complexity of the change, can the hon. Gentleman clarify what the yield is expected to be from the change, which obviously needs to be offset against the cost of implementing it and the allegation of its being disproportionate, one of the issues raised in the consultation?

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Lady will be aware that the tax information impact note again says that the Exchequer impact is negligible None the less, we think that the measure supports our objective of promoting fairness in the tax system by ensuring that the reliefs are correctly targeted. The current regime has no upper limit on the investment premiums payable into a QP, allowing individuals to obtain unlimited relief from higher and additional rates of income tax. The measure will restrict the amount of premiums that can be paid into a QP.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I apologise if I am not following the argument fully. If there is no impact—no cost and no yield—can the Minister explain how that will work in practice and whether any actual change in behaviour will result from the measure being put in place? In terms of economic impact, I cannot see how it can possibly be measured.

Photo of David Gauke David Gauke The Exchequer Secretary

If the hon. Lady is making the point that she would not support a tax measure that did not bring any yield in, I welcome her presumed support for reducing the 50p rate of income tax to 45p, so that is an interesting principle.

Photo of David Gauke David Gauke The Exchequer Secretary

In a moment. It is an interesting principle for her to have accepted.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

That is not what I was saying. If he gives way, I will clarify.

Photo of David Gauke David Gauke The Exchequer Secretary

That is why I am not giving way. We believe that the measure is a matter of fairness. Although we cannot identify an immediate yield as a consequence of the measure, it does protect revenue. It prevents the QP system from being abused in a way that may have an  implication for lost revenue, and we think it is a matter of fairness that a £3,600 limit in the circumstances is the right thing to do.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the Minister for giving way and for giving me the opportunity to clarify my point. If there is no economic benefit or detriment that is recognisable in behavioural change as a result of the policy, I would question whether the Government’s aims are being fulfilled in terms of ensuring fairness, as the policy and the figures that have been laid before the Committee today do not appear to have any economic impact on the individuals affected.

Photo of David Gauke David Gauke The Exchequer Secretary

All I can say is that we have worked closely with the industry to ensure that burdens are minimised. There are no reporting requirements in respect of policies issued before 6 April 2013. The form of statement from customers is not prescriptive and industry can modify existing statements that are completed in this area. The burdens will not prove substantial in the vast majority of cases. Without the measure, there is the opportunity for it to be used in a way that does not target the tax relief.

On the issue raised by my hon. Friend the Member for Eastleigh about how QPs can be used to supply money to pay care home fees, it is worth pointing out that policies existing on 5 April 2013 will not come into the new regime unless the amounts saved are increased above the limit, so they can continue to save provided they do not go over that limit. As I said, the limit is there to ensure fairness in the tax system.

A point was raised about the comparison with the ISA. The ISA is the primary savings product available to individuals. The limit on QPs is designed to reflect the fact that it is a supplementary savings product, and it is consequently set at a lower level. A question was asked about how the premium limit will work in practice. The annual premium limit of £3,600 applies from 6 April 2013 for premiums payable under QPs in a 12-month period. As I said earlier, prior to 21 March 2012, policies are unaffected unless amended on or after 6 April 2013.

With those points of clarification, I want to reiterate that this measure supports the Government’s objective of promoting fairness in the tax system by ensuring that tax reliefs for QPs are correctly targeted. It will restrict the amount of premiums that can be paid into a QP, thereby ending unlimited relief in higher and additional rates of income tax. It is one of a number of measures in the Bill to ensure that wealthy individuals pay their fair share of tax, and I hope the clause will stand part of the Bill.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Schedule 9 agreed to.