Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
Internet Publications
Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
218

502
Exception from section 501 for loans to buy life annuities
(1)
Section 501 does not apply to a loan made under a contract for a life annuity if
all the interest on the loan is eligible for tax relief.
(2)
If part of the interest is eligible for tax relief, section 501 only applies to the part
of the loan carrying ineligible interest.
5
(3)
For the purposes of this section, interest is eligible for tax relief if it is eligible
for relief under section 353 of ICTA (general provision for relief for interest) as
a result of section 365 of ICTA (loan to buy life annuity).
503
Exception from section 501 for certain loans under qualifying policies
(1)
Section 501 does not apply to a loan made by the body issuing a qualifying
10
policy if either or both of conditions A and B are met.
(2)
Condition A is that interest is payable on the loan at a commercial rate.
(3)
Condition B is that the loan was made—
(a)
before 6th April 2000,
(b)
to a full-time employee of the body issuing the policy, and
15
(c)
to assist the employee in purchasing or improving a dwelling to be
used as the employee’s only or main residence.
504
Part surrenders: payments under guaranteed income bonds etc.
(1)
This section applies to so much of any payment of an amount by an insurer
under a guaranteed income bond contract as meets conditions A to C (and so
20
it falls within section 500(d)).
(2)
Condition A is that it is a sum which, but for subsection (6), would be treated
for income tax purposes as interest or an annual payment.
(3)
Condition B is that it is not a sum paid or falling to be paid because of
provisions of the guaranteed income bond contract which, taken alone, would
25
constitute a contract of insurance—
(a)
within Part 1 or 2 of Schedule 1 to the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544), but
(b)
not within paragraph 1 or 3 of Part 2 of that Schedule (life and annuity
contracts including certain linked long-term contracts).
30
(4)
Condition C is that it does not represent late payment interest.
(5)
This section does not apply if the payment comprises the whole of the last
benefit to be paid under the contract (ignoring late payment interest).
(6)
A sum to which this section applies is not regarded as interest or as an annual
payment for any income tax purposes.
35
(7)
In this section—
“guaranteed income bond contract” means a policy of life insurance that
is a contract of insurance which—
(a)
is within paragraph 1 or 3 of Part 2 of Schedule 1 to the Financial
Services and Markets Act 2000 (Regulated Activities) Order
40
2001, and

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
219

(b)
is neither an annuity contract nor a contract effected in the
course of a company’s pension business,
“late payment interest”, in relation to a contract, means interest on an
amount payable under the contract which is paid for a period
beginning on or after the date of the occurrence as a result of which the
5
amount is payable, and
“pension business” has the meaning given by section 431B of ICTA (or the
corresponding enactment in force when the contract was effected).
505
Assignments etc. involving co-ownership
(1)
For the purposes of this Chapter (except this section and section 506)—
10
(a)
a transaction to which this section applies is taken to be one or more
assignments of part only of the rights under the policy or contract in
respect of which the transaction occurs, and
(b)
those assignments are the ones specified in section 506.
(2)
If subsection (1) applies to a transaction that is an assignment—
15
(a)
of the whole of the rights under a policy or contract, or
(b)
of a part of or a share in those rights,

any reference to the assignment in this Chapter (except this section and section
506) is to be read as a reference to the assignment or assignments that the
transaction is taken to be under subsection (1).
20
(3)
This section applies to a transaction in respect of which conditions A and B and
either condition C or D or E are met.
(4)
Condition A is that—
(a)
immediately before the transaction the whole or part of, or a share in,
the rights under the policy or contract (“the ownership interest”) was in
25
the beneficial ownership of one person or of two or more persons
jointly (“the old ownership”), and
(b)
as a result of the transaction the ownership interest becomes
beneficially owned by one person or by two or more persons jointly or
in common (“the new ownership”).
30
(5)
Condition B is that at least one person who is a member of the old ownership
is also a member of the new ownership.
(6)
Condition C is that there is only one member of the old ownership and there
are two or more members of the new ownership.
(7)
Condition D is that there are two or more members of the old ownership and
35
at least one of them is not a member of the new ownership.
(8)
Condition E is that there are two or more members of the old ownership and
the share in the ownership interest of at least one of those members (see section
506(5)) exceeds that member’s share in the ownership interest as a member of
the new ownership (see section 506(6)).
40
506
Assignments occurring when there is a co-ownership transaction
(1)
This section sets out the assignment or assignments that are taken to occur
under section 505 when there is a transaction to which that section applies (“a
co-ownership transaction”).

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
220

(2)
If there is only one member of the old ownership, that member is to be treated
as if the co-ownership transaction had been the assignment by that member of
so much of the ownership interest as exceeds that member’s share in the
ownership interest as a member of the new ownership.
(3)
If there are two or more members of the old ownership, each such member who
5
is not a member of the new ownership is to be treated as if the co-ownership
transaction had been the assignment by that member of that member’s share in
the ownership interest.
(4)
If there are two or more members of the old ownership, each such member
whose share in the ownership interest as a member of the old ownership
10
exceeds that member’s share in the ownership interest as a member of the new
ownership is to be treated as if the co-ownership transaction had been the
assignment by that member of that excess.
(5)
If the old ownership consists of two or more persons beneficially entitled
jointly, the members of the old ownership are to be treated as if the ownership
15
interest had been in their beneficial ownership in equal shares instead of
jointly.
(6)
If the new ownership consists of two or more persons beneficially entitled
jointly, the members of the old ownership are to be treated as if the result of the
co-ownership transaction had been that the ownership interest was in the
20
beneficial ownership of the members of the new ownership in equal shares
instead of jointly.
(7)
In this section “the ownership interest”, “the old ownership” and “the new
ownership” are to be read as indicated in section 505(4).
507
Method for making periodic calculations under section 498
25
(1)
This section deals with the calculation required to be made in relation to a
policy or contract as at the end of an insurance year under section 498(2)
(requirement for periodic calculations in part surrender and assignment cases)
to determine—
(a)
whether a gain has arisen, and
30
(b)
if so, the amount of the gain.
(2)
There is a gain if the net total value of rights surrendered or assigned exceeds
the net total allowable payments (see subsections (4) and (5)).
(3)
The gain is equal to the excess.
(4)
To calculate the net total value of rights surrendered or assigned—
35

Step 1

Find—
(a)
the value, as at the time of its surrender or assignment, of any part of or
share in the rights under the policy or contract which has been
surrendered at any time or assigned at any time for money or money’s
40
worth, and
(b)
the value, as at the time of its assignment, of any part of or share in the
rights under the policy or contract which has been assigned otherwise
than for money or money’s worth in an insurance year beginning on or
before 5th April 2001,
45

in each case determining the value in accordance with section 508.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
221


Step 2

Add together those values.

Step 3

If any previous calculation events (other than personal portfolio bond events)
have occurred in relation to the policy or contract—
5
(a)
add together each such value which has been brought into account
under this subsection on those events, and
(b)
subtract the result of paragraph (a) from the result of step 2.
(5)
To calculate the net total allowable payments—

Step 1
10

Find the allowable element in each allowable payment by multiplying the
amount of the payment by—

where X is the number of insurance years in the period beginning with the year
in which the payment is made and ending with the insurance year as at the end
of which the calculation under this section is required to be made or, if it is less,
15
20.

Step 2

Add together the allowable elements for all allowable payments.

Step 3

Add together all the allowable elements brought into account under this
20
subsection on a previous calculation event.

Step 4

Subtract the result of step 3 from the result of step 2.
(6)
In this section—
“allowable payment” means a premium, other than a retained
25
replacement policy premium, and
“retained replacement policy premium” has the meaning given in section
495(2).
508
The value of rights partially surrendered or assigned
(1)
For the purposes of sections 507, 511 and 512, where any part of or share in
30
rights conferred by a policy or contract is surrendered, the value of the part of
or share in the rights surrendered is the amount or value of the sum payable or
other benefits arising because of the surrender, except where subsection (2) or
(3) applies.
(2)
In the case of a surrender within section 500(c) (loans by insurers to which
35
section 501 applies), the value for those purposes is an amount equal to the
loan.
(3)
In the case of a surrender within section 500(d) (payments by insurers under
guaranteed income bonds etc.), the value for those purposes is the amount to
which section 504 applies.
40
(4)
For the purposes of sections 507, 511 and 512, where any part of or share in
rights conferred by a policy or contract is assigned, the value of the part or
share as at the time of the assignment is its surrender value at that time.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
222

(5)
For the requirement to ignore certain benefits, see section 497 (disregard of
trivial inducement benefits).
509
Chargeable events in certain cases where periodic calculations show gains
(1)
If the calculation in section 507 shows that a gain has arisen as at the end of the
insurance year, the gain is treated as arising on the occurrence of a chargeable
5
event at the end of that year, unless condition A, B or C is met.
(2)
Subsection (1) is subject to section 485(3) (which restricts the circumstances in
which such events occur in relation to qualifying policies).
(3)
Condition A is that during the insurance year there has been an assignment for
money or money’s worth of part of or a share in the rights conferred by the
10
policy or contract.
(4)
Condition B is that during the insurance year there has been both—
(a)
a surrender of part of or a share in the rights conferred by the policy or
contract, and
(b)
a later assignment, otherwise than for money or money’s worth, of the
15
whole or part of or a share in the rights conferred by the policy or
contract.
(5)
Condition C is that the insurance year is the final insurance year.
(6)
See section 510 (transaction-related calculations in certain part surrender and
assignment cases) if one or both of conditions A and B are met.
20
Transaction-related calculations and part surrender or assignment events
510
Requirement for transaction-related calculations in certain part surrender and
assignment cases
(1)
This section applies if—
(a)
the calculation in section 507 shows that a gain has arisen as at the end
25
of the insurance year, but
(b)
one or both of the conditions specified in section 509(3) and (4) are met
(and so no chargeable event is treated as occurring at the end of the year
under section 509).
(2)
A calculation is to be made in accordance with section 511 in relation to each
30
relevant transaction during the insurance year to determine—
(a)
whether the transaction resulted in a gain arising on the policy or
contract, and
(b)
if so, the amount of the gain.
(3)
In this section and sections 511 to 514 “relevant transaction” means—
35
(a)
a surrender of part of or a share in the rights under the policy or
contract, or
(b)
an assignment of such a part or share for money or money’s worth.
(4)
If two or more relevant transactions occurred during the insurance year, a
calculation in accordance with section 511 is to be made in relation to each of
40
them successively in the order in which they occurred.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
223

(5)
A calculation falling to be made in accordance with section 511 in relation to a
relevant transaction occurring in the final insurance year is to be made before
any calculation under section 491 for the chargeable event that ends that year.
(6)
But, in the case of a relevant transaction so occurring, subsections (2) and (4)
are subject to section 513(5) (under which those subsections do not apply to
5
some such relevant transactions).
511
Method for making transaction-related calculations under section 510
(1)
This section deals with the calculation required to be made under section 510
to determine—
(a)
whether a relevant transaction which has occurred during an insurance
10
year resulted in a gain arising on the policy or contract, and
(b)
if so, the amount of the gain.
(2)
There is a gain if the transaction value for the relevant transaction (see
subsection (4)) exceeds the amount of available premium left for the relevant
transaction as calculated in accordance with section 512.
15
(3)
The gain is equal to the excess.
(4)
The transaction value for the relevant transaction is the value in accordance
with section 508, as at the time of its surrender or assignment, of the part of or
share in the rights under the policy or contract which has been surrendered or
assigned in the transaction.
20
(5)
Subsections (2) and (4) are subject to section 513(4) (under which the
transaction value is to be reduced in certain cases where the relevant
transaction occurs in the final insurance year).
512
Available premium left for relevant transaction
(1)
For the purposes of section 511(2), the amount of available premium left for a
25
relevant transaction is the amount, if any, by which the available net allowable
payments (see subsection (3)) exceed the available net total values for the year
(see subsection (4)).
(2)
But the amount of available premium left for the relevant transaction is nil if—
(a)
one or more other relevant transactions have occurred in respect of the
30
relevant contract earlier in the insurance year, and
(b)
for the latest of them the calculation in section 511(2) produced a gain.
(3)
To calculate the available net allowable payments—

Step 1

Calculate the net total allowable payments as at the end of the insurance year
35
in accordance with section 507(5).

Step 2

If
(a)
one or more other relevant transactions (“the earlier transactions”) have
occurred in respect of the policy or contract earlier in the insurance
40
year, and
(b)
for the latest of them the calculation in section 511(2) produced no gain,

subtract the sum of the transaction values for the earlier transactions from the
result of step 1.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
224

(4)
To calculate the available net total values for the year—

Step 1

Calculate the net total value of rights surrendered or assigned, as at the end of
the insurance year, in accordance with section 507(4), ignoring for the purposes
of step 3 in that section any relevant transactions in that year that are treated as
5
chargeable events under section 514.

Step 2

Subtract from the result of step 1 the value, as at the time of its surrender or
assignment, of any part of or share in the rights under the policy or contract
which has been surrendered in the insurance year or assigned in that year for
10
money or money’s worth, determining the value in accordance with section
508.
513
Special rules for part surrenders and assignments in final insurance year
(1)
This section applies if—
(a)
the calculation in section 511 falls to be made in relation to a relevant
15
transaction occurring in the final insurance year,
(b)
the total transaction value for that transaction exceeds the gains limit
(see subsections (2) and (3)), and
(c)
paragraph (b) has not applied to a relevant transaction occurring earlier
in the final insurance year in respect of the policy or contract in
20
question.
(2)
The total transaction value is the total of—
(a)
the transaction value for the transaction in question in accordance with
section 511(4), and
(b)
the transaction values for any relevant transactions occurring earlier in
25
the final insurance year in respect of the policy or contract in
accordance with that section.
(3)
The gains limit is the amount calculated, as at the end of the final insurance
year, as the amount of the gain that would have been treated as arising on the
occurrence of the chargeable event that ends that year if in relation to that
30
year—
(a)
section 509(1) did not refer to condition C, and
(b)
sections 510(2) and (4) and 514(1) did not apply.
(4)
The transaction value for the relevant transaction used for the calculation in
section 511(2) is reduced by the excess mentioned in subsection (1)(b).
35
(5)
No calculations are required to be made under section 510(2) and (4) in relation
to any subsequent relevant transaction in respect of the policy or contract.
514
Chargeable events where transaction-related calculations show gains
(1)
If the calculation in section 511 shows that a relevant transaction resulted in a
gain arising on the policy or contract, the relevant transaction is treated as a
40
chargeable event.
(2)
Subsection (1) is subject to section 485(5) (which restricts the circumstances in
which such events occur in relation to qualifying policies).
(3)
Subsection (4) applies if—