Life insurance policies: recalculating gains on part surrenders

Life insurance policies

Policyholders will be able to apply to HMRC to recalculate gains on part surrenders where the normal rules would produce a wholly disproportionate gain.

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Who should read this? 

Life assurance policyholders and their agents and advisers.

Summary of proposal 

The Finance Bill contains clauses which introduce a process to allow policyholders to apply to HMRC to recalculate the gain on a partial surrender or part assignment on a just and reasonable basis when the normal rules would otherwise produce a wholly disproportionate gain.

Key changes from the draft legislation

The draft clauses published last December set out a route for a taxpayer to apply to HMRC for a just and reasonable calculation of the taxable gain arising on a part surrender of a policy when the application of the existing mechanical rules results in a substantial taxable gain completely disproportionate to the economic gain.

In the revised clauses, HMRC have clarified that persons who can apply are those who would be liable for any of the tax on the gain before any recalculation.  The time limit for making the claim will be the usual four years following the end of the tax year in which the gain arose, rather than being two years from the end of the insurance year as originally proposed.

The new clauses also include a non-exhaustive list of factors that HMRC can take into account in considering whether a gain is wholly disproportionate – the economic gain, the premium paid for the policy and the amount of tax otherwise payable. But the new clauses deny any recalculation where the gain is connected with arrangements where the main purpose, or one of the main purposes, was to obtain a tax advantage.

There is also a consequential amendment which will allow the amount of tax recovered by a taxpayer from trustees (for example where a policy is held on trust but the gain is taxable on the settlor) to be adjusted following a recalculation.

Timing 

These changes will take effect from Royal Assent although the provisions for adjusting the amounts recovered from trustees will also apply to amounts recovered before Royal Assent.

Our view 

This informal solution to the problem of disproportionate gains is probably the most practical given their expected rarity.  Putting into statute some of the factors to take into account in considering whether a gain is ‘wholly disproportionate’ is helpful given that, as the explanatory notes to the draft clause point out, the phrase sets a high threshold.  The lengthening of the time limit for making a claim is welcome.

Nevertheless, affected policyholders will need to be made aware of the possibility of applying for a recalculation and it would be useful to have constructive guidance from HMRC on how this procedure will be applied in practice.

Contacts

Daniel Crowther +44 (0)20 7694 5971

daniel.crowther@kpmg.co.uk 

Finance Bill 2017

Finance Bill 2017

The Government published Finance (No. 2) Bill 2016-17 on Monday 20 March.

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