Taxman limits life insurance tax relief

TAX RELIEF on certain life insurance policies is to be capped in any given 12-month period, HM Revenue & Customs has revealed in its latest consultation document.

The proposed rule, which will cap tax relief on qualifying policies at £3,600, will take effect on contracts issued on or after 6 April 2013. Temporary rules will apply for policies issued from 21 March to 5 April 2013, inclusive.

The qualifying policy (QP) regime was launched in 1968 at the same time as the special rules for applying income tax to investment gains realised by policyholders from life insurance policies.

That saw 20% corporation tax levied on investment returns accruing in the possession of insurers and friendly societies on both qualifying and non-qualifying policies.

A qualifying policy regime generally sees gains exempt from income tax in the hands of policyholders, unless, for example, the policy is surrendered in less than ten years after the policy was issued.

Investment premiums payable into a qualifying policy have not previously been limited, allowing individuals to potentially claim unlimited relief from higher rates of income tax.

In the consultation document, the government stated it does not believe such unlimited relief is affordable or sustainable, particularly in the current economic climate.

It added it had become aware qualifying policies had been marketed to customers affected by other policy changes, such as limits on tax reliefs on pension savings registered through pension schemes.

The consultation paper states no more than £3,600 may be paid in to a qualifying policy during any 12-month period on or after 6 April 2013.

Rather than set periods, the premium limit would be applied to premiums due and payable in any period of 12 months.

The limit will apply throughout the life of a policy, while variable premium policies will be non-qualifying immediately if premiums payable will exceed £3,600 in any 12-month period.

Policies with premium reviews will also cease to be qualifying if the premiums payable in any 12-month period are increased so that they exceed £3,600.

Premiums payable under policies issued on or after 21 March 2012 and before 6 April 2013 will count towards the premium limit for policies issued on or after 6 April 2013.

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