Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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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.
213

493
The value of a policy or contract
(1)
In the case of a chargeable event within section 484(1)(a) (i) or (iii), (c), (d) or (e)
(surrender of all rights, final participation in profits, maturity or, in the case of
a contract for a life annuity that provides for taking a capital sum on death,
death or taking a capital sum as a complete alternative to annuity payments),
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the value of the policy or contract is the total of—
(a)
any sum payable because of the event, and
(b)
in the case of a policy of life insurance or a capital redemption policy,
any value or amount specified in subsection (2).
(2)
The value or amount is—
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(a)
if a right to periodical payments arises because of the event, an amount
equal to the capital value of those payments at the time the right arises,
and
(b)
the amount or value of any other benefits arising because of the event.
(3)
Subsection (1) does not apply to a surrender treated as made under section 490
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(last payment under guaranteed income bond contracts etc. treated as total
surrender).
(4)
In that case the value of the rights treated as surrendered is treated as being
equal to the amount of the payment treated as the surrender.
(5)
In the case of a chargeable event within section 484(1)(a)(ii) (assignment of all
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rights), the value of the policy or contract is the amount or value of the
consideration for the assignment.
(6)
But an assignment of a policy of life insurance or a contract for a life annuity
between connected persons is treated as made for a consideration equal to the
market value of the policy or contract.
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(7)
In the case of a chargeable event within section 484(1)(b) (death), the value of
the policy is its surrender value immediately before the death.
(8)
This section is subject to—
section 495 (disregard of certain amounts in calculating gains under
section 491), and
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section 497 (disregard of trivial inducement benefits).
494
The total allowable deductions for a policy or contract
(1)
To calculate the total allowable deductions for a policy or contract for the
purposes of section 491—

Step 1
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Add together—
(a)
the total amount of premiums paid under the policy or contract before
the event, and
(b)
if the event occurs at the end of the final insurance year (see section
499), the amount of any repayment or partial repayment of a loan
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treated under section 500(c) as a surrender of a part of the rights under
the policy or contract.

Step 2

In the case of a contract for a life annuity under which any annuity payments
have been made, reduce the result of step 1 by so much of those payments as
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is—

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
214

(a)
exempt under section 717 (exemption for part of purchased life annuity
payments), or
(b)
determined to be the capital element in those payments under section
658 of ICTA.
(2)
In the case of a capital redemption policy which has been assigned for money
5
or money’s worth before the event, the reference in paragraph (a) of step 1 in
subsection (1) to the total amount of premiums paid under the policy or
contract before the event is a reference to the total of—
(a)
the amount or value of the consideration given for the last such
assignment, and
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(b)
the total amount of premiums paid under the policy or contract after
that assignment and before the event.
(3)
References to the policy in paragraphs (a) and (b) of step 1 in subsection (1) and
in subsection (2) include any related policy.
(4)
Subsection (1) is subject to—
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section 495 (disregard of certain amounts in calculating gains under
section 491), and
section 496 (modification of this section: qualifying endowment policies
held as security for company debts).
495
Disregard of certain amounts in calculating gains under section 491
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(1)
A retained replacement policy premium is ignored in calculating—
(a)
the total benefit value of a policy under section 492(1), or
(b)
the total allowable deductions for a policy under section 494(1).
(2)
In subsection (1) “retained replacement policy premium” means a sum
which—
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(a)
has been payable under a policy which is one of two or more policies
treated as a single policy under section 542(1) (qualifying policies and
policies replacing them), and
(b)
is such a sum as is mentioned in section 542(4) and meets the condition
in that section.
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(3)
For the purposes of section 492(1)(b) and (c) (total benefit value: capital sums
and benefits paid or conferred before the event in question), any sum paid or
benefit conferred under a policy is ignored if it is attributable to a person’s
disability.
(4)
For the purposes of section 492(1)(f) (total benefit value: assignments), a share
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assigned before the event is ignored if—
(a)
it was assigned in an insurance year (see section 499) that began on or
after 6th April 2001, and
(b)
it was not assigned for money or money’s worth.
(5)
The reference to the policy in subsection (3) includes any related policy.
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496
Modification of section 494: qualifying endowment policies held as security
for company debts
(1)
This section applies if—

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
215

(a)
a chargeable event within section 484(1)(a)(i), (b) or (c) (surrender of all
rights, death or maturity) occurs in relation to a qualifying endowment
policy (see subsection (7)),
(b)
immediately before the event occurs the rights under the policy are
held as security for a debt owed by a company, and
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(c)
the company debt conditions are met (see subsection (4)).
(2)
If—
(a)
the amount of the debt exceeds the amounts referred to in paragraph (a)
of step 1 in section 494(1) (the total amount of premiums paid before the
event), and
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(b)
the company makes a claim within two years after the end of the
accounting period in which the chargeable event occurs,

section 494 applies as if that paragraph referred instead to the amount of the
debt.
(3)
If the amount of the debt varied during the policy period, it is to be taken for
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the purposes of subsection (2) as the lowest amount at which it stood during
that period.
(4)
The company debt conditions are that—
(a)
throughout the policy period, the rights conferred by the policy have
been held as security for a debt owed by the company referred to in
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subsection (1)(b),
(b)
the capital sum payable under the policy in the event of death during
the term of the policy is not less than the amount of the debt when the
insurance was made,
(c)
any sum payable under the policy as a result of the event is applied in
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repayment of the debt (except so far as it exceeds the debt), and
(d)
the debt was incurred to pay money applied for the purposes of the
company’s trade premises.
(5)
Money is applied for the purposes of a company’s trade premises if it is
applied—
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(a)
in purchasing an estate or interest in land to be occupied by the
company for the purposes of a trade carried on by it, or
(b)
for the purpose of the construction, extension or improvement (but not
the repair or maintenance) of buildings which are or are to be so
occupied.
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(6)
If during the policy period the company incurs a debt by borrowing in order to
repay another debt, references to a debt in subsections (3) and (4) include both
debts where appropriate.
(7)
In this section—
“accounting period” is to be read in accordance with section 12 of ICTA,
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“the policy period” means the period beginning with the making of the
insurance and ending immediately before the chargeable event, and
“qualifying endowment policy” means a policy which is a qualifying
policy as a result of paragraph 2 of Schedule 15 to ICTA.
497
Disregard of trivial inducement benefits
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(1)
A benefit other than a payment of money is ignored for the purposes of
calculating any gain under this Chapter if—

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
216

(a)
it is provided by an insurance company for any person as an
inducement for the person to enter into—
(i)
a policy or contract to which this Chapter applies, or
(ii)
a later transaction in relation to such a policy or contract, and
(b)
the condition specified in subsection (2) is met.
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(2)
The condition is that the total cost to the insurance company of providing the
benefit and any other such benefits provided by it at any time in connection
with the policy or contract, or any linked policy or contract, does not exceed
£30.
(3)
The Treasury may by order amend the sum for the time being specified in
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subsection (2) so as to increase it.
(4)
For the purposes of this section, a policy or contract is linked to another policy
or contract if—
(a)
their terms are substantially identical, and
(b)
when one of them is issued or made the issue or making of the other is
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contemplated.
Part surrenders and assignments: periodic calculations and excess events
498
Requirement for periodic calculations in part surrender or assignment cases
(1)
This section applies if—
(a)
a part of, or share in, the rights under a policy or contract is
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surrendered, or
(b)
such a part or share is assigned for money or money’s worth.
(2)
A calculation is to be made in accordance with section 507 in relation to the
policy or contract as at the end of the insurance year in which the surrender or
assignment occurs (see section 499) to determine—
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(a)
whether a gain has arisen on the policy or contract, and
(b)
if so, the amount of the gain.
(3)
For cases where surrenders and assignments of a part of the rights under a
policy or contract are treated as occurring where they would not otherwise do
so, see sections 500 to 506.
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499
Meaning of “insurance year” and “final insurance year”
(1)
In this Chapter “insurance year”, in relation to a policy or contract, means the
12 months beginning with—
(a)
the date on which the insurance or contract is made, or
(b)
any anniversary of that date.
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(2)
Subsection (1) is subject to subsections (3) and (5).
(3)
An event referred to in section 484(1)(a)(i) or (iii) or (b) to (e) (surrender of all
rights, final participation in profits, death, maturity, or taking a capital sum as
a complete alternative to annuity payments) is treated as ending the insurance
year in which it occurs.
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(4)
In this Chapter “final insurance year” means an insurance year that is ended as
a result of subsection (3).

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
217

(5)
But if, as a result of subsection (3), an insurance year would begin and end in
the same tax year—
(a)
that insurance year and the previous insurance year are treated as one
insurance year, and
(b)
“final insurance year” needs to be read accordingly.
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500
Events treated as part surrenders
The following events are treated for the purposes of this Chapter as a surrender
of a part of the rights under the policy or contract in question—
(a)
the falling due of a sum payable as a result of a right under a policy or
contract to participate in profits where further rights remain under it,
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(b)
in the case of a contract for a life annuity which provides for a capital
sum to be taken as an alternative in part to the annuity payments,
taking the capital sum,
(c)
the making of a loan to which section 501 applies, and
(d)
the making of a payment to which section 504 applies (payments by
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insurers under guaranteed income bonds etc.).
501
Part surrenders: loans
(1)
This section applies to a loan (and so it falls within section 500(c)) if it is made
by the insurer under a policy or contract—
(a)
to an individual falling within subsection (2),
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(b)
to trustees falling within subsection (3), or
(c)
to a company falling within subsection (4).
(2)
An individual falls within this subsection at any time if, were a gain to arise in
respect of the policy or contract at that time, the individual would be liable for
tax under this Chapter as a result of section 465 (person liable: individuals).
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(3)
Trustees fall within this subsection at any time if, were a gain to arise in respect
of the policy or contract at that time, they would be liable for tax under this
Chapter as a result of section 467 (person liable: UK resident trustees).
(4)
A company falls within this subsection at any time if, were a gain to arise in
respect of the policy or contract at that time, it would be treated as forming part
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of the company’s income under section 547 of ICTA (method of charging gain
to corporation tax).
(5)
For the purposes of subsection (1), a loan—
(a)
is treated as made by an insurer if it is made by arrangement with it,
and
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(b)
is treated as made to an individual, trustees or a company if it is made
at the individual’s, trustees’ or company’s direction.
(6)
In this section “insurer”, in relation to a policy or contract, means the body
issuing the policy or with which the contract is made.
(7)
This section is subject to—
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(a)
section 502 (exception for loans to buy life annuities), and
(b)
section 503 (exception for certain loans under qualifying policies).