The Inland Revenue have today cut red tape by publishing an extra-statutory concession (ESC) which brings the treatment of non-residents with policies of life assurance more into line with the treatment of non-residents with other forms of income.
The concession is in 3 parts.
Part 1 extends the terms of an existing Statement of Practice. An individual or a company that is not resident in the UK in the year of assessment or company accounting period when they make a `gain’ will not have to pay tax on it. This means less information will have to be provided.
Part 2 is new. A UK insurer will not have to send information to the Inland Revenue about `gains’ made by non-resident policy holders if:
the insurer has given information to the policy holder’s or the branch’s domestic tax authorities; or
the policy is part of the business of a non-UK branch of the insurer unless most of the branch’s business is with UK-residents.
Relaxation of the information requirements will reduce the compliance obligations of insurers who operate through foreign branches whose business is not primarily with UK residents.
Part 3 of the concession is also new. It deals with individuals who come to the UK with personal portfolio bonds (PPBs) who want to take advantage of a transitional relief for PPBs that were in existence when this anti-avoidance legislation was announced on Budget day 1998. An individual who comes to the UK to take up permanent residence or to stay for at least 2 years who needs to change the terms of a PPB to take advantage of the transitional relief will have at least 12 months to do so.
The concession has been the subject of detailed consultation with the Association of British Insurers and is welcomed by it. The Government is grateful to the association. The text of the new concession is attached as an annex to this press Release.
1. An existing Statement of Practice (SP 11/80) explains that the Inland Revenue will not charge tax on these `gains’ if certain conditions are met. Part 1 of the new concession updates this practice bringing it more in line with the rules that apply to other sorts of income. The existing conditions that the insurance must have been made outside the UK and that the proceeds must be payable outside the UK are dropped. The concession will therefore apply to Overseas Life Assurance Business of a UK insurer written out of the UK on a services basis. An individual will not be taxed on a `gain’ made in a year of assessment in which he or she is not resident in the UK. A company will not be taxed on a `gain’ in an accounting period in which the company is not resident in the UK unless the insurance is held by or used by a UK branch of the company.
2. Part 1 of the concession will apply for the current year of assessment 1999-2000 and for accounting periods beginning after 5 April 1999. Statement of Practice 11/80 is withdrawn from that date.
3. UK insurers are generally required to provide information to the Inland Revenue about policy holders and their insurances whenever a `gain’ arises. This information may be used to check that taxpayers have returned `gains’ correctly and, in the case of non-resident policy holders, may be sent to the appropriate fiscal authorities in the country in which the policy holder lives.
4. If an insurer has a branch it must provide information about gains made by the branch’s policy holders.
5. The holder of a personal portfolio bond taken out before 17 March 1998 may in some circumstances vary the terms of the bond to take it outside the Personal Portfolio Bond (Tax) Regulations, SI 1999 No. 1029 (which imposes a yearly charge to tax). A person who is not UK resident but becomes resident has until the end of the first `year’ to make the variation. Part 3 provides that where the individual comes to the UK to take up permanent residence or to stay for at least two years, the `year’ in which to make a change will be treated as the first `year’ which begins on or after the date the policy holder first arrives in the UK to take up permanent residence or to stay for at least two years.
NOTES FOR EDITORS
1. There are special rules for taxing `gains’ made by people who hold certain life insurance policies, capital redemption policies and what are known generally as purchased life annuities. A `gain’ is broadly the difference between the benefits received and the premiums paid but there are special rules where a policy pays out on death and for part withdrawals. A `gain’ may be treated as income of an individual or a company, including where that person is not resident in the UK.
2. The Regulations (SI 1999 No. 1029) giving details of the annual charge to tax on personal portfolio bonds were laid on 30 March 1999. This was announced in an Inland Revenue press release of that date, Taxation of life insurance policy holders, The personal portfolio bonds (tax) regulations.
3. An extra-statutory concession is a relaxation which gives taxpayers a reduction in tax liability to which they are not entitled under the strict letter of the law. Most concessions are made to deal with what are on the whole, minor or transitory anomalies under the legislation, and to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter.
4. Inland Revenue extra-statutory concessions are of general application, but in a particular case there may be special circumstances which must be taken into account in considering the application of a concession. A concession will not be given in any case where an attempt is made to use it for tax avoidance.
5. Inland Revenue concessions are published in a free booklet IR1 which is available from any Tax Enquiry Centre or Tax Office. They are also obtainable from the Inland Revenue Public Enquiry Room, West Wing, Somerset House, London WC2R 1LB. The extra-statutory concession published today will be included in a later edition of the booklet.
6. A personal portfolio bond is usually a type of life insurance policy. The benefits under the policy are determined by reference to the value of a portfolio of assets that is chosen by and is personal to the policy holder. This type of policy enables a policy holder to retain most of the benefits of direct personal investment. As the holder can decide when to surrender the policy, he or she is able to defer for many years the personal tax charge on any income or gains arising on the investments held in the policy.
EXTRA-STATUTORY CONCESSION B53
Non-UK residents and chargeable event gains on life policies, life annuities and capital redemption policies, the information duties of UK insurers and Personal Portfolio Bonds held by individuals not resident in the UK on 17 March 1998
Non-UK resident individuals and companies and chargeable event gains on life policies, life annuities and capital redemption policies
1. On the occurrence of a `chargeable event’ a `gain’ may be treated as arising in connection with a policy of life insurance, a life annuity, or a capital redemption policy. Chapter II of Part XIII of the Income and Corporation Taxes Act 1988 (ICTA) defines what are `chargeable events’ and how a `gain’ is calculated and it contains the other provisions relating to chargeable events which are referred to below .
2. This concession is about those circumstances in which a gain may be treated as part of the:
total income of an individual; or
income of a company.
The circumstances are when an individual or company is beneficial owner of the rights conferred by a policy or contract, when the rights are held on trusts created by an individual or a company, and when the rights are held as security for a debt owed by an individual or a company
3. The provisions that deem a gain to be part of the income of an individual or a company are not restricted to United Kingdom residents. But, except in the situation referred to in paragraph 4, the Inland Revenue will not pursue liability to tax in respect of a gain that is treated as income of an individual or a company if the individual or company is not resident in the United Kingdom at any time during the year of assessment or accounting period, as appropriate, in which the chargeable event occurs.
4. A tax liability may arise if a policy or contract is held as property used by, or held by, a United Kingdom branch or agency of a company that is not resident in the United Kingdom.
5. Nothing in this concession affects:
a gain that is treated as constituting income payable to non-resident trustees or a company or other institution resident or domiciled outside the United Kingdom; and
the tax treatment of a benefit that an individual ordinarily resident in the United Kingdom receives from the trustees, the company or other institution.
The individual may be taxed on an amount equal to the value of the benefit or, if lower, the amount of the gain and any other income receivable by the trustees, the company or other institution.
6. This part of the concession takes effect on or after 6 April 1999. The previous practice outlined in Statement of Practice 11/80 is withdrawn from 5 April 1999.
The information duties of UK insurers
7. Insurers are required to provide information to the Inland Revenue about policy holders and their policies and contracts when a chargeable event occurs. The information duty of insurers is at section 552, ICTA. There are a limited number of circumstances in which information is not to be provided, for example when the insurer is satisfied that no gain arises. The obligation to provide information is not restricted to providing information about policy holders resident in the United Kingdom. Information that an insurer supplies about a non-United Kingdom resident policy holder may be exchanged with the fiscal authorities in the country in which the policy holder resides.
8. A UK insurer must provide information about chargeable events in relation to policies and contracts, including policies or contracts of a branch of it outside the UK, unless the conditions outlined below apply. Information must be given about all policies and contracts carried out or administered at the branch and not just those effected at the branch. This therefore includes business transferred to a branch. The insurer may arrange for the branch to provide the information directly to the Inland Revenue.
9. The circumstances in which an insurer does not have to provide information are where:
the policy holder is not resident in the United Kingdom at any time during the year of assessment or accounting period, as appropriate, in which the chargeable event occurs; and either
the insurer has provided information about the gain or the sum payable or other benefits conferred by reason of the event to the fiscal authority of the country in which the policy holder resides or, in the case of branch business, to the fiscal authority of the country in which the branch is situated; or
the policy or contract forms part of the business of the company carried out or administered at a branch outside the United Kingdom of the company and the business of the branch is not mainly with residents of the United Kingdom and British citizens.
A branch’s business is for these purposes mainly with residents of the United Kingdom and British citizens if more than 50% of the total of the liabilities of the insurer attributable to the branch relate to policies and contracts with such holders.
10. `Policy holder’ includes the holder of an annuity contract. `Branch’ includes an agency. `Liabilities’ has the meaning given by section 431(2), ICTA.
11. The tests whether information should be supplied should be applied to the best of an insurer’s knowledge and belief taking account of all information in the insurer’s possession, whenever that information was obtained and wherever and in what form it is stored.
12. The liabilities to be taken into account in assessing whether a branch’s business is mainly with residents of the United Kingdom and British citizens are the `closing liabilities’ within the meaning of section 431(2), ICTA at the end of the latest preceding accounting period for which the insurer has prepared its regulatory return.
13. The Inland Revenue may audit an insurer’s books, documents and records to ascertain whether there has been, or is likely to be, any contravention of the information requirements. If an insurer is not supplying information because the conditions in paragraph 9 above apply, the audit may include an audit of any information in the insurer’s possession relevant in demonstrating that the appropriate conditions are satisfied. If the conditions are satisfied the insurer will not be treated as having contravened the requirements of section 552.
14. This is the first concession dealing with the information duties of UK insurers. It may be applied in relation to any duty to provide information that is outstanding as at 23 November 1999.
Personal Portfolio Bonds and individuals not resident in the UK on 17 March 1998
15. The Personal Portfolio Bond (Tax) Regulations, S.I. 1999 No. 1029, impose a yearly charge to tax on policies of life insurance and similar insurances that are personal portfolio bonds within the meaning of those regulations.
16. In some circumstances it is possible to change the terms of a policy taken out before 17 March 1998 to take it outside the definition of a personal portfolio bond. A person who was not resident in the UK on that day and who later becomes resident has until the end of the first ‘year’, as defined at section 546(4) ICTA, to begin on or after 6 April 1999 or, if later, after the policy holder becomes resident in the UK, to make the change.
17. The ICTA makes no provision for splitting tax years in relation to residence and an individual who becomes resident in the UK during a year of assessment is taxed as a resident for the whole year. This means that the time available to make the change under the alternative ‘becoming UK resident rule’ is strictly by the end of the first ‘year’ to begin in the year of assessment in which the policy holder becomes resident. In an extreme case this period could end very shortly after the policy holder arrives in the UK.
18. Where an individual comes to the UK to take up permanent residence or to stay for at least two years the ‘year’ in which to make a change will be treated as the first ‘year’ which begins on or after the date the policy holder first arrives in the UK to take up permanent residence or to stay.
19. This part of the concession takes effect on or after 6 April 1999.