Part surrenders and part assignments of life insurance policies
Published 5 December 2016
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Who is likely to be affected
Beneficial owners of life insurance policies (including capital redemption policies and contracts for life annuities) who part surrender or part assign their policies, as well as the life insurance companies that provide such policies.
General description of the measure
Policyholders who part surrender or part assign these policies can, in certain unusual circumstances, inadvertently trigger taxable gains far in excess of the policy’s underlying economic gain. This measure allows a policyholder who has generated a wholly disproportionate gain to apply to HM Revenue and Customs (HMRC) to have the gain recalculated on a just and reasonable basis.
Policy objective
The measure will provide a fair outcome for policyholders that inadvertently generate wholly disproportionate gains when making a part surrender or part assignment of their life insurance policies.
Background to the measure
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. A consultation on possible options for change was held from 20 April 2016 to 13 July 2016.
Detailed proposal
Operative date
The measure will have effect from 6 April 2017.
Current law
Current law for part surrenders and part assignments of life insurance policies is contained in sections 498 to 514 of Income Tax (Trading and Other Income) Act 2005.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to include new sections 507A and 512A of Income Tax (Trading and Other Income) Act 2005. This will allow policyholders who have generated a disproportionate gain from a part surrender or part assignment of a policy to apply to HMRC to have the gain reviewed. If HMRC considers that the gain is wholly disproportionate then it will be recalculated on a just and reasonable basis and the decision notified to the applicant.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| - | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure is expected to affect fewer than 10 individual policyholders per year who make part surrenders or part assignments of their policies and inadvertently trigger a wholly disproportionate gain. There may be some additional administrative costs for these individuals in applying to HMRC to have their gain recalculated and then calculating subsequent gains going forward.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure will affect individuals within the protected equality groups that tend to be represented amongst those with above average income. It will ensure consistency of treatment in that some members of this particular group may no longer be subject to excessive tax charges if they surrender their life insurance policies in a particular way.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses.
There are an estimated 200 authorised life insurance companies in the UK some of which will be affected by any changes to the tax rules for investment life insurance products.
Affected businesses will incur a negligible one-off cost of familiarisation with the new rules, some staff training and updating literature for clients. There are not expected to be any on going costs.
There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
It is anticipated that implementing the change will require HMRC to provide additional support to policyholders whose part surrenders and part assignments give rise to disproportionate gains. As the number of policyholders impacted by the change is expected to be very small so additional costs (and savings) for HMRC will be negligible.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax receipts and returns.
Further advice
If you have any questions about this change, please contact Darryl Wall on Telephone: 03000 585977 or email: [email protected].