Clause 498: Requirement for periodic calculations in part surrender or assignment cases

527.     This clause based on sections 540, 542, 545 and 546 of ICTA.

528.     Subsection (1) states that the clause applies when there has been an assignment for money or money's worth or a surrender. The source legislation requires a calculation to be carried out at the end of each insurance year, regardless of whether there has been any such assignment or surrender. But, in such an "eventless" year, there could not be any gain, so the calculation would be pointless. See Change 92 in Annex 1.

Clause 499: Meaning of "insurance year" and "final insurance year"

529.     This clause is based on sections 546, 546B and 546C of ICTA.

530.     Subsection (1) defines an "insurance year". The definition is applied for the purposes of Chapter 9, whereas in the source legislation its application is more limited. The source legislation to which the definition is relevant is rewritten in a great number of locations in the Chapter. It is no longer practical to limit the application of the definition.

531.     Subsection (3) sets out how the basic rule is varied when the sequence of insurance years is broken by certain of the events listed in clause 484(1). Where such an event occurs, the year ends at that point and is called the "final insurance year". An assignment of all the rights under the policy or contract is not such an event, as the policy or contract continues in existence despite the change of ownership of the rights.

532.     Where the term "final insurance year" is used in this Chapter, it therefore indicates that one of the specified events in clause 484(1) has occurred.

533.     One of those events is "a death giving rise to benefits" under a policy of life insurance. The source legislation for the meaning of "insurance year" merely refers to a "death", and does not cross-refer to the definition of a chargeable event in sections 540, 542 and 545 of ICTA. A cross-reference to events under clause 484, rather than words describing the event, is more precise. It also disregards a death which does not give rise to benefits.

534.     Subsection (5) caters for when the final insurance year would begin and end in the same tax year. But for the rule in this subsection, the previous insurance year would end in the same tax year as the final year, and any part surrender or assignment in that year might give rise to a gain that would be charged for that year in addition to the gain on the final event. To avoid (in most cases) the complexity of two sets of computations in one tax year, the previous insurance year is merged with the final year as a single insurance year, the "final insurance year".

535.     Clause 509(5) accordingly sets aside any chargeable event that would arise on a periodical calculation under clause 507, following a part surrender or assignment, where the year is the final insurance year. But, where the circumstances in clause 510 apply, and the year in question is the final insurance year, there will be more than one computation in that year, and there may be a gain on a transaction-related calculation as well as a gain under clause 491. In most cases the persons liable in respect of the gain on the transaction-related calculation and the gain on the final event are different.

Clause 500: Events treated as part surrenders

536.     This clause deals with some circumstances that would not otherwise be regarded as a surrender of part of the rights under a policy or contract. It is based on section 539 of ICTA (paragraph (a)), section 542 of ICTA (paragraph (b)), section 548 of ICTA (paragraph (c)) and section 79 of FA 1997(paragraph (d)).

537.     Note that an "event" within this clause is not a "chargeable event", unless:

• the calculation under clause 507 results in a gain; and

• there is a chargeable event by virtue of clause 509 or clause 514.

538.     Paragraph (b) makes explicit the treatment of the circumstance where a capital sum is taken as an alternative to part of annuity payments under a contract for a life annuity. See Change 93 in Annex 1.

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

Clause 501: Part surrenders: loans

540.     This clause is based on section 548 of ICTA. It counters the avoidance of tax when the profit accrued on the policy or contract is paid to the policy or contract holder in the form of a loan.

541.     The clause includes references to a loan to a company, and to section 547 of ICTA, for reasons comparable to those given in the commentary on clauses 485 and 496.

542.     See paragraph (c) of step 1 in clause 494(1) for the inclusion, as an allowable deduction in certain calculations, of any repayment in whole or in part of a loan which is treated by virtue of this clause as a part surrender under clause 500.

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

Clause 502: Exception from section 501 for loans to buy life annuities

544.     This clause is based on section 548 of ICTA.

Clause 503: Exception from section 501 for certain loans under qualifying policies

545.     This clause is based on section 548 of ICTA.

546.     Condition B reflects the saving made for certain loans made before 6 April 2000 by paragraph 18(3) of Schedule 4 to FA 1999 (when tax relief for interest was largely withdrawn).

Clause 504: Part surrenders: payments under guaranteed income bonds etc.

547.     This clause is based on section 79 of FA 1997. It applies to payments by the insurer from a certain type of life insurance policy - "guaranteed income bonds" - that would otherwise be taken into account for tax purposes as interest or an annual payment.

548.     Subsection (6) strips such a payment of any character it has as interest or an annual payment so that it is not charged to income tax as such. It is then treated as a part surrender of the rights under the contract under clause 500.

549.     The meaning of "guaranteed income bond contract" is given in subsection (7), by reference to the statutory instrument regulating insurance business (under powers provided by the Financial Services and Markets Act 2000).

550.     Subsection (5) excludes the final such payment from the application of this clause. But see clause 490, under which that payment is treated as the surrender of all rights under the contract.

Clause 505: Assignments etc. involving co-ownership

551.     This clause and clause 506 are based on section 546A of ICTA. They cater for changes in the person(s) having beneficial ownership of the whole or a part of, or a share in, the rights under the policy or contract, however the change comes about. That ownership is described in these clauses as the "ownership interest" (see subsection (4)). But this clause does not apply when there is a complete change of ownership of that interest (for example, when all the rights are assigned by the old owner or owners to a completely different person or persons).

552.     These clauses ensure that only those owners who have reduced their share in the ownership interest (whether partly or completely) are treated as having made an assignment which may give rise to a gain and a chargeable event. Whether the deemed assignment is an assignment for money or money's worth (which is material for clause 498(1)) depends on how the change of ownership was effected between the parties.

553.     This clause applies for the purposes of the Chapter (other than this clause and clause 506, which of necessity refer to the actual assignment). References elsewhere to an assignment have therefore to be construed in accordance with the rules in these clauses.

Clause 506: Assignments occurring when there is a co-ownership transaction

554.     This clause introduces the term "co-ownership transaction" to describe a transaction to which clause 505 applies. It is based on section 546A of ICTA.

555.     Subsections (2) to (4) define the deemed assignment for the particular permutation of ownership described in each. They should be construed in the light of subsections (5) and (6), which substitute ownership in equal shares (so that each owner is treated as having a distinct share) for joint ownership (where all owners have an interest in all rights attached to the share).

556.     Subsections (2) and (4) deal with the reduction in a person's share in the rights under the policy or contract. Subsection (3) deals with the complete disposal of a person's share in the rights.

Clause 507: Method for making periodic calculations under section 498

557.     This clause provides the core calculation rules which determine whether there is a gain and, if so, the amount of the gain, when there has been an assignment for money or money's worth or a surrender of part of, or a share in, rights under the policy or contract. The calculation introduces the terms "net total value of rights surrendered or assigned" and "net total allowable payments". Subsequent rules (see clause 509) determine whether a chargeable event occurs in respect of that gain. It is based on sections 540, 541, 542, 543, 545, and 546 of ICTA.

558.     But the calculation under this clause is displaced when certain transactions have occurred (see clause 510).

559.     Subsection (4) sets out how the net total value of rights surrendered or assigned is found. Step 1 identifies, and step 2 totals, all relevant amounts from the current and previous insurance years. Step 3 then subtracts all such amounts taken into account on previous "calculation events". That leaves the total of those amounts since the last such event. This may be a period of one or more insurance years, depending on when the latest calculation event occurred. Clause 508 contains rules for how the values of part surrenders or assignments of rights are to be measured.

560.     Subsection (5) sets out how to calculate net total allowable payments, that is, the amount that may be deducted from the product of the calculation in subsection (4). It is similar in approach to the calculation of total allowable deductions in clause 494, but treats the premiums paid in a special way. An allowance is made, equal to 5% of the premium payment or payments for each insurance year to date, including the year in which the premium was paid. The allowance cannot exceed 100% of the premium or premiums for a particular year.

561.     Through the definition of "allowable payment", subsection (6) excludes a "retained replacement policy premium" from the amounts that can be taken into account as allowable payments in the calculation under subsection (5). As mentioned in the commentary on clause 495, a retained replacement premium is a sum which becomes payable by the insurer in connection with the ending of the policy, but which is retained by the insurer and used to meet some or all of the premiums payable under a later policy.

562.     The source legislation provides that retained replacement premiums are to be ignored in calculating the amount of premiums taken into account under sections 540 and 541 of ICTA. But in the case of a chargeable event within section 540(1)(a)(v) of ICTA it is section 546 of ICTA that provides the method of calculating gains. In particular, section 546(1)(b) of ICTA deals with premiums to be taken into account in the calculation of part surrenders and assignments. Clearly, it is that section that paragraph 20(3) of Schedule 15 to ICTA was intended to affect, although it does not refer to section 546 of ICTA.

563.     The calculation of net total allowable payments in subsection (5), read with the definition of "allowable payment" in subsection (6), therefore rewrites the source legislation so that retained replacement premiums are ignored in the calculation of the gain arising in the case of chargeable events on a part surrender or assignment.

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

Clause 508: The value of rights partially surrendered or assigned

565.     This clause is based on section 546 of ICTA and section 79 of FA 1997.

566.     Subsection (1) sets out the general rule for part surrenders. It is similar to the rule for valuing the surrender of all rights under a policy or contract (see clause 492(1) and (2)). This rule fills a gap in the source legislation. In the FA 1968 legislation for taxing chargeable event gains, a gain (including a gain on a part surrender or assignment) was calculated by reference to "the amount or value of the sum payable or other benefits arising by reason of the event" (see paragraph 12(1)(b) of Schedule 9 to that Act). However, FA 1975 used slightly different wording for gains in respect of part surrenders and assignments when introducing the provisions now in the source legislation. Section 546(1) of ICTA refers to "the value, as at the time of surrender or assignment, of any part of or share in the rights conferred by the policy or contract..".

567.     No change was intended from the value used previously for the regime. The wording in section 546(1) of ICTA was intended to refer to the amount that is paid as a result of the part surrender or assignment; that is, what the policy holder receives for the part surrender or assignment. So the clause provides that, where there is a surrender of a part of, or share in, rights under a policy or contract, the value of the part or share surrendered is the amount or value of the sum payable or other benefits arising because of the surrender, unless another rule applies.

568.     Subsection (2) is based on section 548 of ICTA. That section provides that, in such a case, the same results are to follow as if, at the time the sum was lent, there had been a surrender of the whole or part of the rights conferred by the policy or contract, and the sum had been paid as consideration for the surrender. This clause drops the fiction that the amount of a loan is the consideration for a surrender.

Clause 509: Chargeable events in certain cases where periodic calculations show gains

569.     This clause is based on sections 540, 542, 545, 546 and 546B of ICTA.

570.     The transactions mentioned in conditions A and B are those that trigger the operation of clause 510. Subsection (6) signposts what happens in such circumstances.

571.     The effect of condition C is that there cannot be a chargeable event as a result of a gain arising under the calculation in clause 507 when the insurance year is the final insurance year.

Transaction-related calculations and part surrender or assignment events

Overview

572.     These clauses perform the same function as clauses 498 to 509 for a particular circumstance. This is where, in any insurance year, there has been:

• a part assignment of rights under the policy or contract for money or money's worth; or

• an assignment of such rights by gift after a part surrender of rights in that year.

573.     Each transaction in that year is the subject of a separate calculation. The rules here ensure that liability attaches to the person who profits from the transaction regardless of the change in the ownership of the rights in the policy or contract (otherwise liability on the gain would attach to the new owner).

Clause 510: Requirement for transaction-related calculations in certain part surrender and assignment cases

574.     This clause is based on section 546C of ICTA.

575.     Where the clause applies, subsection (2) substitutes a fresh calculation under clause 511, for each "relevant transaction" in the insurance year, for the discarded single calculation for that year under clause 507. This is a change of approach from that taken in the source legislation, which is drafted in terms of a "section 546 excess occurring at the end of any year" being charged to tax under section 546C of ICTA. But the outcome is the same whichever approach is taken.

576.     Any assignment for money or money's worth in that year of a part of, or share in, the rights is relevant. Any surrender in that year of a part of, or share in, the rights is relevant. That is, the clause applies to any such surrender in the year, regardless of whether that surrender was instrumental in triggering the clause or whether it preceded or followed an assignment of any kind. This is described by subsection (3) as a "relevant transaction". That term is used also in clauses 511 to 514.

577.     By carrying out a series of calculations, any of which may give rise to a chargeable event (see clause 514), the gain is attributed to those liable at the time of that event, in accordance with clauses 464 to 468, rather than to those liable by reference to how the rights are held in respect of chargeable events occurring at the end of the insurance year.

578.     Subsection (6) indicates that subsections (2) and (4) are modified by the rules in clause 513 for the final insurance year (which provides that no subsequent calculations are made once a "gains limit" has been reached).

Clause 511: Method for making transaction-related calculations under section 510

579.     This clause and the next set out the calculation required by clause 510. This clause is based on section 546C of ICTA.

580.     The calculation in these clauses is designed to isolate, for each relevant transaction, the value of the transaction in question and how much of the premiums paid to the end of the insurance year in question is available to set against that value. The excess is the chargeable gain.

Clause 512: Available premium left for relevant transaction

581.     This clause is based on section 546C of ICTA. Subsection (1) provides a calculation method to isolate the available premium for the purposes of clause 511. This is described as the excess of the "available net allowable payments" over the "available net total values".

582.     The method works by identifying how much is left, after franking certain amounts, of the gross amount of allowable premiums paid under the policy or contract to the end of the insurance year, applying the one-twentieths rule in clause 507. This is step 1 in subsection (3). As a result of applying the rule in clause 507 for net total allowable payments, the amount of premium deducted in calculating gains on a calculation event in a previous insurance year has already been removed from the pool of allowable premiums.

583.     Subsection (3) continues by deducting (in step 2) the total of the transaction values for any previous relevant transactions in this insurance year that did not give rise to a gain when the calculation in clause 511 was made. This effectively mops up the equivalent amount of the gross allowable premiums.

584.     Subsection (4) next calculates an amount labelled the "available net total values", for the purpose of the calculation in subsection (1). This is the amount found by deducting:

• the total value of all part surrenders and part assignments for money or money's worth in the insurance year (step 2); from

• the total value of all part surrenders and part assignments (as in clause 507(4) steps 1 and 2; that is, including assignments not for money or money's worth if they are in an insurance year beginning on or before 5 April 2001) less all such values taken into account in gains on calculation events in previous insurance years (step 1).

585.     The computation in subsection (4) isolates and quantifies the value of any part surrender or part assignment between the last calculation event and the beginning of the present insurance year. That value will have been insufficient to give rise to a gain in the relevant insurance year. Again this effectively uses up the equivalent amount of the allowable premiums.

586.     Having deducted:

• the amount of allowable premiums used in earlier calculation events (subsection (3) step 1, by virtue of the calculation under clause 507(5));

• the amount of any values for part surrenders and part assignments in years since then, but before the current year (subsection (4)); and

• the amount of any values in relevant transactions of this year which did not produce a gain (subsection (3), step 2);

there is available, against the transaction value of the relevant transaction in question, any "allowable payment" (that is, part of the premiums) accrued between the last calculation event in an earlier year and the end of the present year, as reduced by the amounts mentioned in the second and third bullets.

587.     Subsection (2) short-circuits the whole process for any relevant transaction of the year which occurs after the first relevant transaction to yield a gain. For such subsequent relevant transactions, the amount of available premium is nil. The gain will equal the transaction value for the relevant transaction.

Clause 513: Special rules for part surrenders and assignments in final insurance year

588.     This clause is based on section 546D of ICTA. The purpose of the clause is to ensure that the total amount of gains calculated under clause 511 on relevant transactions, added to the gain subsequently calculated under clause 491 on the event that brings the final insurance year to an end, is not greater than the gain on the final event would have been without relevant transaction calculations.

589.     For this purpose, the gain under clause 491 is calculated disregarding gains on relevant transactions (as defined in clause 510(3)). That re-calculated gain acts as a cap on the total gains to be charged in respect of the policy or contract for that year.

590.     In effect, that cap is placed on the latest gain on a relevant transaction, where that gain, added to previous gains on relevant transactions, would exceed the cap. Where that happens, so much of the gain as would exceed the cap is ignored, and the gain on any subsequent relevant transaction or on the event that brings about the end of the final insurance year is treated as nil. But the value of such transactions will already have been taken into account as appropriate in calculating the gains limit, and so have contributed to the size of the cap.

591.     Subsection (4) expresses this as a reduction in the transaction value for the particular relevant transaction in relation to which the total of the transaction values for the first and successive relevant transactions in the year (see subsection (2)) first exceeds the "gains limit". The reduction in the transaction value for that relevant transaction is the amount that eliminates the excess over the gains limit.

Clause 514: Chargeable events where transaction-related calculations show gains

592.     This clause provides that, if the calculation under clause 511 shows a gain, the relevant transaction is itself the occurrence of a chargeable event at that time. This contrasts with chargeable events under clause 509, which occur at the end of the insurance year, regardless of when in that year the part surrender or part assignment took place. This clause is based on sections 546B and 546C of ICTA.

593.     Subsections (3) and (4) nevertheless allot the gain on the chargeable event under this clause, for the purposes of clauses 464 to 467, to the tax year in which the insurance year ends where liability to tax on the gain would otherwise fall into the preceding tax year. The date of the chargeable event may therefore be in an earlier tax year than that for which the gain is charged.

594.     Subsection (5) clarifies the order in which chargeable events take place in the final insurance year, when there is a transaction-related chargeable event in that year. The order prescribed here avoids any suggestion that amounts relevant only to the calculation on the final event enter into the calculations under clause 511, even though that both calculations take the full period of the final insurance year into account.

Clause 515: Requirement for annual calculations in relation to personal portfolio bonds

595.     Clauses 515 to 526 set out the special charge in respect of personal portfolio bonds.

596.     This clause is modelled on the approach taken in clauses 498 and 510. It is based on regulation 5(1) of PPB(T)R.

597.     Subsection (1) makes clear that it is the status of the policy or contract as at the end of the insurance year, that is, whether it is a personal portfolio bond at that time, which determines whether this requirement applies.

598.     Subsection (3) gives the time as at which the calculation is to be done. Section 553C of ICTA (the section providing the powers used to make PPB(T)R) does not use "insurance year" but instead refers to a "yearly charge", using section 546(4) of ICTA to construe "yearly". The latter section is the source legislation for the definition of "insurance year" in clause 499. The clause makes explicit that "yearly" refers to an insurance year.

599.     Subsection (4) provides that the calculation required by this clause is to be made regardless of any other calculation also required by the Chapter. So a gain, treated under clause 525 as arising on the chargeable event mentioned in subsection (3) of that clause, is added to any other gains arising in the same tax year on other chargeable events in respect of the personal portfolio bond.