That's Life

ALLISON PLAGER reports the changes made by the Finance Act 2001 to the tax treatment of transfers of shares in life insurance products.

THE TAX TREATMENT of insurance contracts tends to inspire fear into those unused to dealing with them. In essence, insurance contracts are taxed according to whether or not they are qualifying and, as most policies taken out by taxpayers are qualifying, the general practitioner is unlikely to have to deal with non-qualifying contracts on a regular basis.

A qualifying policy has to meet certain criteria and these vary according to the type of life assurance policy taken out. For instance, an endowment policy must have a minimum term of ten years, and have regular premiums paid into it.

Non-qualifying policies are subject to tax on the net proceeds if the policyholder is a higher rate taxpayer. Any gains have to be included in the individual's tax return. The insurer was bound to advise only the Revenue of the amount of the chargeable event, thus causing problems if the insurer did not also tell the taxpayer.

The new legislation provided by the Finance Act 2001 has amended procedures, so that the insurer has to provide certificates to both the policyholder and the Revenue showing in essence:

• any unique identifying designation given to the policy or contract;
• the nature of the chargeable event, e.g. the date it happened;
• any payments already made from the policy and whether or not they are capital payments;
• the amount of gain;
• the number of relevant years for the purpose of computing the appropriate fraction; and
• whether or not the recipient should be treated as having paid basic rate tax on the gain.

The full details are shown in new section 552(5), Taxes Act 1988, as inserted by paragraph 18 of Schedule 28 to the Finance Act 2001. New subsections 552(6) and (7) state the latest day by which the information must be provided to the policyholder and Revenue respectively. This will for the policyholder normally be three months from the date that the chargeable event occurred, and for the Revenue, three months following the end of the year of assessment in which the event happened.

All this on the face of it looks quite simple, but complications arise when changes are made in ownership of joint policies for whatever reason, but typically divorce. Divorce is hardly the most pleasant life experience that people go through, and so receiving an unexpected tax bill in respect of a gain made on the transfer of a share in a formerly joint endowment policy would rub salt into a festering wound. Yet pre-Finance Act 2001, in England and Wales, where one party of a jointly owned endowment policy transferred his or her rights in the policy to the other party, the transferee often became liable to any income tax chargeable on the transfer.

These transactions are known as part assignments, and are governed by the general law relating to jointly owned property. In England and Wales, because there are different types of co-ownership, it has not always been clear what has been transferred when interests in or out of a jointly owned policy are made. So inquiries had to be made to clarify what had been transferred and to whom, etc. In Scotland, where such policies are normally held as tenants in common, this specific problem did not arise.

The matter was confused further as a result of the 1975 changes in the legislation relating to part assignments. The intention was that any tax charge would apply to the rights given up by the person making the transfer. However, this was not always what happened, and the effect of the law was that the recipient was liable for any tax due on the transfer of the policy, regardless of whether he has paid for the part assigned. This unintentional result of the legislation was self-evidently unfair, and the Revenue, thinking likewise, has amended the law to correct this anomalous situation. Thus all policies under English law will be treated as if they are held as tenants in common, so that when ownership is changed, rather than the policy being treated as disposed of as a whole, there will be a part assignment and the transferor will be liable for any tax due.

These changes are in Schedule 28 to the Finance Act 2001. This amends section 539 to provide for an assignment for the whole of, or part or share in, the rights conferred in a policy to be treated as a part assignment where the conditions in new section 546A are met, and amends other existing legislation to reflect the new measures, and also inserts new section 546A, 546B, 546C and 546D.

The Revenue is taking a perhaps unusually benevolent stand towards those who have suffered from the 'wrong' law in the last six years. It has said in its Budget press release REV BN19 dated 7 March 2001, that anyone who has included a gain on a tax return in respect of a part assignment, paid tax accordingly, and now believes that the tax should not have been paid, should contact the relevant tax office. On receipt of full details of the relevant policy, the parties involved, the circumstances in which the assignment was made and the date it was made, the Revenue will check whether the gain was correctly reported or not. If, under the amended legislation, income tax was charged wrongly, the Revenue will repay it with interest. Finally, in these particular circumstances, the Revenue says that it will not collect the tax due as a result of the correction from the party who would now be liable to the charge.

The changes apply to chargeable events arising in connection with policy years beginning on or after 6 April 2001.

Issue: 3848 / Categories: