Telephone Scam message to agents - HMRC notice

2 Dec 2018

The consultative options were:

Option 1: to charge the economic gain whenever an amount in excess of 5% of the premium is withdrawn using the formula A/A+ B where A is the amount withdrawn and B is the policy value immediately after withdrawal.

Option 2: to replace the current 5% tax deferred allowance with a 100% tax deferred allowance. Once all premiums have been withdrawn, subsequent withdrawals are taxed in full.

Option 3: to retain the current method of taxing partial surrenders including the 5% deferral but if the gain exceeds a pre-determined amount, say 3%, the excess would not be immediately charged to tax but carried forward to the next chargeable event

The CIOT evaluated each option against the desirable outcomes (as set out in the consultation at 2.2 and supplemented by an additional desirable outcome suggested by the CIOT ie providing a solution for those taxpayers who face disproportionate gains on partial surrender or assignment in the period up to the change in legislation).

In summary the CIOT‚ s view is that Options 1 and 2 meet more of the desirable outcomes than Option 3. In particular Option 1 and 2 are likely to be more easily understood by policy holders than Option 3. For those reasons, Option 3 is not the preferred option.

Option 1 spreads the liability over the life of the policy allowing a taxpayer to better utilise the starting rate and savings nil rate bands. On the other hand, under Option 1, it is possible that policyholders might be charged to tax in relation to economic gains made in earlier years, notwithstanding that those gains are wiped out in later years with the result that the policy is loss-making overall. This is less likely to occur under Option 2.

Option 2 has the advantage of simplicity and ease of understanding. On the other hand, under Option 2 a taxpayer may be propelled into higher rates (subject to top-slicing relief which we assume will be retained) as a result of a large gain being incurred in a single year, the premiums having been fully withdrawn in earlier years.

It is noteworthy that according to the assessment of impacts none of the options is expected to have any exchequer impact other than a negligible one. This assessment appears to be based at least in part upon the figure of around 600 individual policyholders who annually make part surrenders or part assignments of life insurance policies in excess of the current 5% allowance. There is no attributed source in the consultation for this number of policyholders. If option 2 is adopted, this assessment needs to be revisited as the tax position for policy holders will be more favourable than the current position which could lead to an increase in take-up of these products.

Technical Team