Clause 471: Determination of shares etc.

449.     This clause determines each person's share of the rights in the policy or contract where, because the rights are held jointly by, or as security for a debt owed by, two or more persons, that share has to be established to work out the liability of one or more persons in respect of a gain. It is based on section 547A of ICTA.

450.     Subsections (2) to (5) deal with a person's interest in a policy or contract held as security for one or more debts owed by two or more persons. Each debtor is treated as the sole debtor in respect of a separate debt. The share of any gain for each liable person is proportionate to the share of the total debt for which security was provided.

451.     Subsection (7) deals with the case where different rights under a policy or contract are held by different people. For example, the right to a death benefit under a policy may be held by one person and the right to critical illness benefit under the same policy may be held by another person. The rights are shared between them on a just and reasonable basis. See Change 14 in Annex 1.

Clause 472: Trusts created by two or more persons

452.     This clause determines each settlor's share of the rights, or of a share in the rights, in policies or contracts where, immediately before the chargeable event in question, the rights (or that share) are held on non-charitable trusts created by two or more persons. It also sets out how that share is determined if the property held on trust was added by different settlors, whether at the time the trust was created or at a later date. It is based on section 547A of ICTA.

453.     Subsections (3) to (7) determine the appropriate share if settlors contribute different property to the trust or a new settlor adds property to a trust already created. The trust is treated as if it had been created by all of them, including the new settlor where applicable, and each is treated as the only settlor for the purposes of this clause. The rules set out explicitly when someone is regarded as having contributed property to the trust. For example, subsection (7) applies when A contributes property to what is essentially B's settlement because B has made an equivalent contribution to A's settlement. In that case A is not treated as the person providing property for the purposes of subsection (6).

454.     Subsection (4)(c) allocates a bundle of types of property between settlors on the basis of a "just and reasonable" apportionment where this is necessary for the purposes of subsections (2) and (3). See Change 14 in Annex 1.

Clause 473: Policies and contracts to which Chapter 9 applies: general

455.     This clause is based on section 539 of ICTA.

456.     Subsection (2) provides definitions. The definition of a "life annuity" is by reference both to this Bill and to ICTA because the policy holder and the person liable (whether the tax charge is to income tax or corporation tax) may not be the same and may not be subject to charges under the same tax. The Chapter does not provide a definition for the more readily understood term "policy of life insurance" (nor is one provided in the source legislation). But clause 545 indicates that "policy", unless the context otherwise requires, means both a policy of life insurance and a capital redemption policy.

457.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

Clause 474: Special rules: qualifying policies

458.     This clause is based on sections 553 and 553A of ICTA. "Qualifying policy" is defined in section 832(1) of ICTA as "a policy of insurance which is a qualifying policy for the purposes of Chapter 1 of Part 7". That is, it is in effect a policy meeting the conditions set out in Schedule 15 to ICTA.

459.     Subsection (4) takes away qualifying policy status from a policy issued by a non-UK resident insurer which ceases to meet one of the conditions in paragraph 24(3) of Schedule 15 to ICTA (by virtue of which it was a qualifying policy). Broadly, the conditions in that paragraph are met when the policy forms part of business done through the insurer's UK branch.

460.     Subsection (5) denies qualifying policy status to a policy which is part of the overseas life assurance business of the insurer, that is, a policy taken out by a non-UK resident policy holder with an insurer operating in the United Kingdom. The subsection applies in relation to the chargeable event in question.

Clause 475: Special rules: personal portfolio bonds

461.     This clause is new.

Clause 476: Special rules: foreign policies

462.     Although gains from foreign policies and contracts are taxable under this Chapter alongside gains from UK policies and contracts, there are a number of differences of treatment. Primarily, these arise from the fact that the underlying investment profit has not been subject to UK tax (or to an equivalent tax regime). However, subject to these differences, any rule in this Chapter referring to a policy or contract, or to one or more of the insurance products listed in clause 473(1), applies to foreign policies and contracts. This clause is based on sections 553, 553A and 553B of, and paragraph 24(1) of Schedule 15 to, ICTA.

463.     The source legislation uses the terms "new non-resident policy", "overseas policy" and "new offshore capital redemption policy". The "new" in those terms indicates such policies were issued on or after the commencement date for the provisions introducing special rules. The terms used in this Chapter simply add "foreign" to the descriptions used for comparable UK policies and contracts.

464.     The definitions for a "foreign policy of life insurance" and a "foreign capital redemption policy" each contain two categories. This reflects the origin at various times of the differences of treatment for policies of life insurance and capital redemption policies, which:

• are issued by a non-UK resident insurer (introduced by FA 1984); or

• are other policies forming part of the insurer's overseas life assurance business (introduced by FA 1998).

465.     Some policies in the second category may also fall into the first. However, other than for the construction of the definitions themselves, certain rules in clauses 474 and 531, and certain paragraphs in Part 6 of Schedule 2 to the Bill, the distinction between the categories is not material to the operation of this Chapter.

466.     There is no provision in the Chapter (or relevant Parts of Schedule 2 to the Bill) that applies exclusively to a foreign contract for a life annuity (although most of the contracts affected by, say, clause 531(3)(c) will be foreign). No definition is therefore provided for such contracts.

467.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

Clause 477: Special rules: certain older policies and contracts

468.     This clause is new.

Clause 478: Exclusion of mortgage repayment policies

469.     This clause is based on section 539 of ICTA. It excludes a particular type of policy taken out in connection with a mortgage. Other types of policy taken out in that connection may be affected by the rules for qualifying policies, such as clause 485. See clause 879 for the meaning of "mortgage" in the application of this clause to Scotland.

Clause 479: Exclusion of pension policies

470.     This clause is based on section 539 of ICTA. The term "registered pension scheme" reflects the FA 2004 rules about pension schemes which apply from 2006-07 and include a substituted definition in section 539 of ICTA. A transitional rule in Part 5 of Schedule 2 to the Bill ensures that the unamended definition of a "pension policy" in section 539 of ICTA applies for 2005-06.

Clause 480: Exclusion of excepted group life policies

471.     This clause is based on section 539(2) and (3) of ICTA. A group life policy is typically one taken out for members of trades unions, professional associations and partnerships, paying out successively on the death of any of the lives insured. But for the exclusion provided by this clause, each such death would give rise to a chargeable event under clause 484(1)(b).

472.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts) and Part 5 of Schedule 2 to the Bill (gains from contracts for life insurance etc: pure protection group life policies).

Clause 481: Excepted group life policies: conditions about benefits

473.     This clause is based on section 539A of ICTA. The conditions set out here and in the next clause ensure that the only policies benefiting from the exclusion are those:

• providing death benefits on equal terms for all lives covered; and

• having a surrender value (if any) no greater than so much of the premiums paid to date as provides cover to the earlier of the next premium due date or the end of the policy.

474.     For example, condition A (subsection (2)) sets an upper age limit of 75 for any age-related restriction of the payment of benefits on death in any circumstances. It also disregards any limitation on payment of death benefits for particular reasons (for example, suicide) if the same limitation ("the same specified circumstances") applies to all lives assured.

Clause 482: Excepted group life policies: conditions about persons intended to benefit

475.     This clause completes the conditions relating to an excepted group life policy. It is based on section 539A of ICTA.

476.     Subsection (3) uses the term "connected". Clause 878 applies section 839 of ICTA (how to tell whether persons are connected) for this purpose.

Clause 483: Exclusion of credit union group life policies

477.     This clause excludes a particular type of group life policy. It is based on section 539 of ICTA.

478.     Subsection (2) defines "credit union group life policy" in terms of the single stringent condition such a policy must meet to qualify for exclusion.

Clause 484: When chargeable events occur

479.     This clause is the first of a group of clauses which set out what does or does not constitute a chargeable event under this Chapter. This clause is based on sections 539, 540, 542, 545 and 546C of ICTA, and regulation 6 of PPB(T)R. Later clauses in the Chapter operate by reference to this list of chargeable events (see clauses 485, 491, 493, 496, 499, and 540).

480.     Subsection (1) groups together in paragraph (a) the events applicable to all policies and contracts and, in paragraphs (b) to (e), the events specific to one or more type of policy or contract.

481.     The source legislation treats the events in subsection (1)(a)(iii), (d) and (e) as a surrender of the rights under the policy or contract, which then triggers a chargeable event (see sections 539(4) and 542(2) of ICTA). The clause treats the events themselves as chargeable events without the preliminary treatment of them as surrenders.

482.     Subsection (1)(e) makes clear that, where a capital sum is taken as an alternative to annuity payments, this includes future annuity payments.

483.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

Clause 485: Disregard of certain events in relation to qualifying policies

484.     This clause is based on section 540 of ICTA. It deals with the circumstances in which qualifying policies do not give rise to chargeable events.

485.     Broadly, there will not be a chargeable event if:

• the event is:

• the death of a person whose life is insured; or

• the maturity of the policy; or

• the policy has run for a period measured by the earlier of:

• ten years; or

• three-quarters of the policy's term;

so long as the policy has not been made "paid-up" within that same period.

486.     Subsection (6) re-starts this time calculation of how long the policy has run from the date of variation, if the policy is varied to increase the premiums payable.

487.     Subsections (2) and (3) do not rewrite the words in brackets in the opening of section 540(1)(b) of ICTA "whether or not the premiums thereunder are eligible for relief under section 266". These words add nothing of substance.

488.     Paragraph (b) in each of subsections (2) and (3) reflects a circumstance in which the restriction of what is a chargeable event for a qualifying policy is itself disapplied. It operates where a company would, by virtue of section 547(1)(b) of ICTA, be a person liable to corporation tax on a gain treated as arising on the policy or contract. As described in the commentary on clause 464, attribution of liability to that company does not prevent other persons, such as an individual, also being attributable with liability in respect of the gain. See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

489.     Such a disapplication of the restriction is unnecessary in subsection (5). This subsection is based on section 546B of ICTA. Section 540(5A) of ICTA (on which the restriction in subsections (2) and (3) is based) does not apply to the restriction provided for qualifying policies by section 546B(1A) of ICTA, in relation to events that are found by applying section 546B of ICTA (see section 546C(7)(a) of ICTA for when such events arise).

490.     Subsection (7) deals with the circumstance where a qualifying policy replaces another policy (which may not have been a qualifying policy). It requires certain terms in paragraph 25 of Schedule 15 to ICTA to be met. The new policy will in part have been designated a qualifying policy under Schedule 15 to ICTA because those circumstances were met. This subsection is based on section 553 of ICTA.

Clause 486: Exclusion of maturity of capital redemption policies in certain circumstances

491.     This clause is based on section 545(1) of ICTA. The source legislation refers in part to "annual payments chargeable to tax under Schedule D". The income tax charge on such income is rewritten in the Chapters listed in the clause. The corporation tax charge on such income is still under Schedule D.

Clause 487: Disregard of certain assignments

492.     This clause is based on sections 540, 542, 544 and 545 of ICTA. In the source legislation the assignments mentioned here are ignored only for the purposes of particular provisions under which assignments are chargeable events. But, because the assignments in question are disregarded for the purposes of the Chapter, not only is such an assignment not a chargeable event, it is ignored, as regards that policy or contract, in the operation of the rest of the Chapter.

Clause 488: Disregard of some events after alterations of life insurance policy terms

493.     This clause and the next are based on ESC A96. See Change 89 in Annex 1.

494.     The disregard applies where a policy which is at least 20 years old is effectively made paid-up by the insurer. A chargeable event which might have arisen afterwards as a result of that variation is disregarded if the changes made to the policy would not themselves give rise to a chargeable event.

495.     Subsection (3) extends the disregard to a replacement policy issued by the insurer in lieu of the old, where that is what the insurer does to give effect to the alteration of the original policy's terms.

Clause 489: Conditions applicable to alterations of life insurance policy terms

496.     This clause is based on ESC A96. See Change 89 in Annex 1. The conditions in subsections (2) to (8) ensure among other things that the disregard provided by clause 488 falls away if the policy is reactivated for investment purposes.

Clause 490: Last payment under guaranteed income bonds etc. treated as total surrender

497.     This clause supplements clause 484. It is based on section 79 of FA 1997.

498.     Clause 504 deals with the treatment of payments under guaranteed income bonds prior to the last payment. Subsection (7) of that clause defines the term "guaranteed income bond contract". See the commentary on that clause for further background.

Calculating gains: general

Overview

499.     Clause 491 to 497 set out how to calculate a gain on a chargeable event other than one arising on any part surrender or part assignment, or an event in respect of the special personal portfolio bonds charge.

500.     Clause 491 introduces a number of terms which are used throughout the Chapter for the computation of gains (and defines them in subsection (4)). These are:

• "calculation event" (an umbrella term for events, the occurrence of which is dependent on the outcome of one of several prescribed calculations); and

• "excess event", "part surrender or assignment event" and "personal portfolio bond event" (the types of event which may flow from such a calculation).

Clause 491: Calculating gains: general rules

501.     This clause deals with the calculation rules for all chargeable events other than those triggered by a part surrender or part assignment of rights under the policy or contract, or by the special charge on personal portfolio bonds. It is based on sections 541, 543 and 545 of ICTA and section 79 of FA 1997. (For the relevance of section 79 of FA 1997, see clause 490.)

502.     Subsection (2) introduces the concepts of the "total benefit value" and the "total allowable deductions". These terms are used in other clauses in this Chapter.

503.     Subsection (5) indicates that gains on a previous calculation event include gains on a "related policy" (defined in subsection (6)). See Change 90 in Annex 1.

Clause 492: The total benefit value of a policy or contract

504.     This clause is based on sections 541, 543, 545 and 548 of ICTA, and section 79(3) of FA 1997.

505.     The "total benefit value" of a policy or contract consists of the value of the policy or contract in relation to the event (paragraph (a)) added to capital sums (or benefits or amounts treated as such) derived from the policy or contract prior to the chargeable event itself (paragraph (b)).

506.     Subsection (2) makes clear that capital amounts derived from a related policy are brought in for this purpose.

Clause 493: The value of a policy or contract

507.     The value of a policy or contract is determined by reference to the particular kind of event. This clause is based on sections 541, 542, 543, and 545 of ICTA, and section 79 of FA 1997.

508.     Subsections (1) and (2) provide for the value in the majority of events.

509.     In relation to the reference in subsection (6) to connected persons, see clause 878 (which applies section 839 of ICTA).

Clause 494: The total allowable deductions for a policy or contract

510.     This clause is based on sections 541, 543, 545 and 548 of ICTA.

511.     Step 1 in subsection (1) lists amounts to be taken into account as deductions. Paragraph (a) deals with the vast majority of cases, where the only item to be taken into account is the total premiums paid before the chargeable event. See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

512.     Step 2 in subsection (1) reduces the total allowable deductions for a purchased life annuity by the exempt amount (or capital element) in payments to date. The exempt amount is determined under Chapter 7 of Part 6 of this Bill and (as regards the capital element) under ICTA as appropriate (see the commentary on clause 473).

513.     Paragraph (b) in Step 1 deals with the repayment of loans which were treated as a part surrender of the rights under the policy or contract.

514.     Subsection (2) caters for assignments for money or money's worth of capital redemption policies. In the case of such assignments paragraph (a) in Step 1 in subsection (1) applies to the price paid in respect of the most recent such assignment instead of the premiums paid before that assignment.

515.     Subsection (3) makes clear that premiums etc. paid in respect of a related policy (as defined in clause 491) are included in the calculation of total allowable deductions.

Clause 495: Disregard of certain amounts in calculating gains under section 491

516.     This clause contains rules which exclude various amounts from the calculation of the total benefit value under clause 492 and the total allowable deductions under clause 494 in arriving at the amount of a gain under clause 491. It is based on sections 541, 543 and 545 of ICTA.

517.     Subsections (1) and (2) deal with a retained replacement policy premium. This disregard is based on paragraph 20 of Schedule 15 to ICTA, which deals with the replacement of one qualifying policy by another, where the value of the old policy is used as a premium for the new policy. The old and new policies are treated as a single policy (see clause 542). The value of the old policy is disregarded both in working out the total benefit value of that single policy and, as regards its use as a premium for the new policy, in working out the total allowable deductions for the single policy.

518.     Subsection (4) reflects an amendment in FA 2002 of a rule introduced by FA 2001, under which an assignment which is not for money or money's worth (such as a gift) is not treated as giving rise to a chargeable event. But assignments which were not for money or money's worth still have to be taken into account in calculating gains if they occurred in an "insurance year" (see clause 499) ending before 6 April 2001.

Clause 496: Modification of section 494: qualifying endowment policies held as security for company debts

519.     Although this clause refers to a policy held as security for a company's debt (a circumstance in which liability to corporation tax on a gain arises under section 547(1)(b) of ICTA), this modification is part of the income tax rules because liability on a gain can be still attributable to a person to whom clauses 464 to 468 apply or are relevant. (This is dependent on how the rights under the policy or contract are held.) It is based on section 541 of ICTA. Where this clause applies the eligible amount of the debt is substituted for premiums paid under the policy in calculating any gain. A claim by the debtor company is required.

Clause 497: Disregard of trivial inducement benefits

520.     This clause is based on ESC B42. It excludes non-monetary benefits costing no more than £30 which are offered as free gifts to attract life insurance business from the computation of any gain under this Chapter. See Change 91 in Annex 1.

521.     ESC B42 refers to "gifts" but the clause refers to "benefits" as a more accurate description of what is provided. It also matches more closely the drafting of the various clauses for calculating gains.

522.     Subsection (3) provides for a future increase (or increases), but not for any decrease, in the monetary limit set on this disregard. See clause 873 for the procedural rules which apply to secondary legislation made under powers in this Bill.

523.     The monetary limit is applied by reference to the "policy or contract and any linked policy or contract" taken as one. This caters for an insurance industry practice of issuing "clusters" of policies to give the policy holder any required flexibility in managing the total investment.

Part surrenders and assignments: periodic calculations and excess events

Overview

524.     Clauses 498 to 509 perform the same function for chargeable events which are excess events as do clauses 491 to 496 for the chargeable events those clauses relate to. They set out when this type of part surrender or assignment (including something treated as a part surrender) gives rise to a chargeable event, and the amount of the gain arising on that event. The calculation of the gain is made by reference to the history of the policy or contract from when the insurance or contract was made up to the end of the insurance year in which the surrender or assignment occurred. This is the more commonly occurring type of chargeable event arising on a part surrender and assignment.

525.     The clauses introduce further expressions, such as "periodic calculations" (this term is not defined but refers to situations where clauses require calculations and chargeable events are linked to the result of the calculation).

526.     The meaning of "insurance year" and "final insurance year" is provided by clause 499. These terms are widely used in the Chapter in calculating gains and in determining when a gain arises and when a chargeable event occurs.