1.Section 24 introduces Schedule 8 which amends the rules for time apportioned reductions from gains made on life insurance policies for periods when the policyholder is resident outside the UK. Current rules only provide for time apportioned reductions where a life insurance policy has been issued by a foreign insurer. Time apportioned reductions will be extended to life insurance policies issued by UK insurers. Time apportioned reductions will be calculated by reference to the residence history of the person liable to income tax on the gains and not by reference to the residence history of the legal owner of the policy.
2.Paragraph 1 of Schedule 8 amends Chapter 9 of Part 4 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA) (gains from contracts for life insurance etc).
3.Paragraph 2 of Schedule 8 amends section 476 ITTOIA by removing references to section 528 and section 536(6) ITTOIA.
4.Paragraph 3 of Schedule 8 replaces section 528 ITTOIA with new sections 528 and 528A.
5.New section 528(1) provides that new subsection (2) applies to individuals who are liable to chargeable event gains and who have not been resident in the UK during the material interest period (defined in new section 528(5)). From 6 April 2013, when the statutory residence test applies, a day will only fall in new subsection (1)(b) if the individual is not resident in the UK for the whole of the relevant tax year. For information on how new section 528 applies to a year that, for the individual, is split between a UK part and an overseas part, see the Explanatory Notes on the Statutory Residence Test.
6.New section 528(2) provides that an individual’s liability to tax on a gain on a life insurance policy is to be reduced by the appropriate fraction.
7.New section 528(3) provides details of that fraction.
8.New section 528(4) provides that the reference to ‘gain’ in new subsection (2) is the gain reduced in accordance with section 463A(4), 463D(4) or 463E(3) ITTOIA.
9.New section 528(5) defines ‘material interest period’ for the purposes of this section.
10.New section 528(6) provides that new subsections (7) and (8) apply if there has been an assignment between spouses or civil partners before the chargeable event.
11.New section 528(7) explains that the material interest period includes so much of the policy period before the assignment during which the assignor meets condition A, B or C in section 465.
12.New section 528(8) explains that when a period falls under new subsection (7) any reference to an individual under new subsection (1)(b) is to be deemed to also include a reference to the assignor.
13.New section 528(9) provides that references to rights in section 465(2) to (4) ITTOIA include references to a share of those rights.
14.New section 528(10) defines the term ‘policy period’ for the purposes of new section 528.
15.New section 528(11) provides that where a new policy is issued for another policy (policy ‘A’) the ‘policy period’ in new subsection (10) includes the period for which (A) was in existence. If A itself is a new policy issued for another policy (policy ‘B’) the ‘policy period’ in new subsection (10) includes the period for which both A and B are in existence.
16.New section 528(12) explains that ‘new policy’ in new subsection (11) takes its meaning from paragraph 17 of Schedule 15 to ICTA 1988.
17.New section 528A(1) applies to reduce the amount of a personal representative’s tax liability under section 466 ITTOIA on a chargeable event gain where the deceased has not been resident in the UK during the material interest period.
18.New section 528A(2) applies to reduce trustees’ liability to tax on a chargeable event gain under section 467 ITTOIA in respect of a deceased settlor where the deceased was not resident in the UK during the material interest period.
19.New section 528A(3) explains that the liability to tax of personal representatives or trustees on a gain on a life insurance policy is to be reduced by the appropriate fraction.
20.New section 528A(4) provides details of the fraction for new section 528A.
21.New section 528A(5) provides that references to ‘gain’ in new subsection (3) is to the gain after it has been reduced in accordance with section 463C(8) ITTOIA.
22.New section 528A(6) defines ‘material interest period’ for the purposes of new section 528A.
23.New section 528A(7) applies subsections (8) and (9) if there was an assignment between spouses or civil partners prior to the deceased’s death and the deceased was the assignee.
24.New section 528A(8) explains that the material interest period includes so much of the period prior to the assignment that the assignor met conditions A, B or C in section 465.
25.New section 528A(9) explains that when a period falls under subsection (8) any reference to an individual under new subsection (1)(b) or (2)(b) is to be deemed to also include a reference to the assignor.
26.New section 528A(10) provides that references to rights in section 465(2) to (4) ITTOIA include references to a share of those rights for the purposes of new section 528A subsections (6) and (8).
27.New section 528A(11) defines the term ‘policy period’ for the purposes of new section 528A.
28.New section 528A(12) provides that where a new policy is issued for another policy (policy ‘A’) the ‘policy period’ in new sub-section (11) includes the period for which (A) was in existence. If A itself were a new policy issued for another policy (policy ‘B’) the ‘policy period’ in new sub-section (11) will include the period for which both A and B are in existence.
29.New section 528A(13) explains that ‘new policy’ in subsection (12) takes its meaning from paragraph 17 of Schedule 15 to ICTA 1988.
30.Paragraph 4 of Schedule 8 repeals section 529 ITTOIA.
31.Paragraph 5(1) of Schedule 8 amends section 536 ITTOIA (top slicing relief).
32.Paragraph 5(2) of Schedule 8 amends section 536(6) to provide that the top slicing relief calculation in section 536(2) does not apply where the gain on a life insurance policy is reduced under new section 528.
33.Paragraph 5(3) of Schedule 8 amends section 536(7).
34.New section 536(7) provides that in computing top slicing relief the number of complete years for which the policy has run before the chargeable event gain arises will be reduced by the number of complete years in the material interest period during which the individual was non-UK resident.
35.Paragraph 6 of Schedule 8 inserts a new sub-paragraph (14) into section 552 of ICTA (information: duty of insurers).
36.Paragraph 7(1) and (2) of Schedule 8 sets out the effective dates for the changes made by Schedule 8.
37.Paragraph 7(3) of Schedule 8 defines ‘variation’ and ‘increase in the benefits secured’ for the purposes of paragraph 7 (2)(a).
38.Paragraph 7(4) of Schedule 8 explains the date on which the insurance or contract is made when a policy falls under section 473A ITTOIA for the purposes of paragraph 7(1) and (2).
32.Special rules apply income tax to investment profits (gains) realised by individuals from life insurance policies and capital redemption policies. The rules are known as the chargeable event gain regime.
33.Provision is made within the regime to ensure that chargeable event gains arising on policies issued by foreign insurers are reduced in proportion to the policyholder’s period of residence outside the UK at any time during the life of the policy. Very broadly, this means that gains accruing during an individual's period of residence outside the UK are excluded from the charge to UK tax.
34.Time apportioned reductions are currently not available to policies issued by UK insurers even though individuals with such policies may also have periods of residence outside the UK.
35.In addition, the amount of the reduction provided by the current rules may be inappropriate in some circumstances. For example, relief is given by reference to the residence history of the legal owner of the policy rather than the person liable to income tax on the gains (generally the beneficial owner).
36.A consultation document was issued 13 August 2012 to invite views on reforming the rules to allow time apportioned reductions to be made available to individuals with policies issued in the UK, who have a period of residence outside the UK and to develop a more appropriate method to calculate time apportioned reductions that also interacts effectively with the new statutory residence rules.