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Finance Act 2012

Background Note

10.Gains from life insurance policies, life annuity contracts and capital redemption policies are taxed as income. They can arise on the happening of “chargeable events” such as the maturity of a policy, an assignment for money or money’s worth and surrenders of all or part of the rights under a policy.

11.These rules apply to each individual policy. However arrangements have been designed with the aim of deferring income tax that may arise when policies come to an end by ‘shifting’ into one policy investment profits attributable to premiums paid into a number of different policies. The arrangements ensure that these policies, with no investment gains as a result of the “shift” referred to above, are brought to an end first with no tax liability arising even though economic investment profits may arise from the premiums paid into these policies.

12.This measure removes any scope to defer income tax in this way by recognising the economic position and treating all such interdependent policies as a single policy for the purposes of the chargeable event gain regime. Standard industry arrangements which divide a sum invested across a number of identical but genuinely distinct and economically self-contained policies will not be affected.

13.The amount of gain when a policy comes to an end is calculated by deducting the total amount of premiums paid into the policy plus gains that have previously arisen under the policy (earlier gains); from the total value of any benefits received over the whole life of the policy. Tax may then be due where any gains resulting from the calculation are included in the income of one of the persons chargeable to tax under the special income tax rules for life insurance policies.

14.However, there was no requirement that the earlier gains need to have formed part of the income of one of these persons. A number of income tax avoidance schemes took advantage of the deduction for earlier gains to reduce the amount of gains liable to income tax when a policy comes to an end. These schemes used arrangements under which earlier gains arose when there was no person liable to tax on them (because, for example, the earlier gains were attributable to a person who was not UK resident) in order to reduce income tax otherwise due on investment profits from life insurance policies. This measure removes such opportunities.

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