VI.1.1 This is a technical note and general guide about the tax implications for charities and their donors surrounding the acquisition of and proceeds from life insurance policies and capital redemption policies. For ease of reference, when this note refers to 'insurance policies', it means both these types of policy.
VI.1.2 The tax implications can be complex for both the charity and its donors. Charity trustees may, therefore, consider it prudent to seek professional advice before entering into an insurance policy or accepting a transfer of an insurance policy from a donor.
VI.1.3 There are a number of problem areas about the suitability of insurance policies as investments for charities. HM Revenue & Customs (HMRC) view is that it is for the appropriate regulatory body – the Charity Commission for charities in England and Wales or the Office of the Scottish Charity Regulator (OSCR) in Scotland – to consider whether charities should apply their funds in this way. HMRC is concerned with the taxation implications of charities doing so. The taxation implications fall into four areas:
VI.2.1 HMRC cannot accept premiums paid by charities on insurance policies (including policies assigned in favour of charities) as qualifying investments within type 12 of section 558 Income Tax Act 2007 or type 12 of section 511 Corporation Tax Act 2010 (previously Paragraph 9(1) Schedule 20 Income and Corporation Taxes Act 1988). Further, HMRC do not accept such payments as qualifying expenditure within the previous definition in S506 ICTA1988. That is, HMRC regard the payment of premiums by a charity as non-charitable expenditure within section 543(f) ITA 2007 or section 496(d) CTA 2010.
VI.2.2 While section 558 ITA 2007 and section 511 CTA 2010 (previously Paragraph 9(1)) gives HMRC the power to consider investments other than those specified at types 1 to 11 of those Acts (previously Schedule 20), such investments should be of the same kind as those specified. HMRC do not consider that premiums paid under an insurance policy have the same character as those specified investments. Such premiums are payment of consideration for entering into a contractual relationship. Further, regular premiums are paid in discharge of obligations under such a contractual relationship. The policy holders acquire or maintain rights under the contract; they do not acquire any entitlement to an interest in the underlying investments. The underlying investments remain the property of the insurer.
VI.2.3 HMRC do not consider amounts paid as premium under insurance policies to be qualifying expenditure (previously within section 506 ICTA 1988) but as non- charitable expenditure within section 543(f) ITA 2007 or section 496(d) CTA 2010, as they are not laid out in furtherance of a charity's charitable objects. [Annex II, 'non charitable expenditure' of the Guidance notes for charities, gives advice on the tax treatment where a charity incurs non-charitable expenditure.]
VI.3.1 Payments made to a charity by a donor, with the intention that they be used to pay the premiums due under an insurance policy transferred to the charity by that donor would not be disqualified from Gift Aid. However, as indicated above, the application of funds in payment of premiums may negate any advantage to the charity in this respect.
VI.4.1 There is no relief available under section 431 ITA 2007 or section 203 CTA 2010 (previously section 587B ICTA 1988) for the value of insurance policies gifted to a charity. Insurance policies are not included in the list of investments at section 432 ITA 2007 or section 204 CTA 2010 that are qualifying investments for the purposes of section 431 ITA 2007 or section 203 CTA 2010.
Gains may arise such as:
Accounting periods beginning on or before 31 March 2008
VI.5.2 If the charity is a company for the purposes of the Taxes Acts (which includes an unincorporated association), there will be a Case VI1 charge on the chargeable event gain made as provided by Section 541 and Section 547(1)(b) Income and Corporation Taxes Act 1988. Moreover no tax is treated as having been paid on such a gain when made by a charitable company.
VI.5.3 Provided any partial withdrawals in respect of the life assurance bond fall below the 5 per cent threshold set by section 546 ICTA 1988, liability to Case VI1 tax on the corporate charity in respect of those withdrawals is deferred until the policy comes to an end when they will be taken into account as relevant capital payments.
VI.5.4 Charities are not exempt from tax in respect of income which is chargeable under Case VI1 of Schedule D by virtue of Section 547(1)(b) ICTA 19881. So the charity will be liable to Corporation Tax on any gain.
Accounting periods beginning on or after 1 April 2008
VI.5.5 Sections 541, 546 and 547 ICTA 1988 were repealed by Schedule 14 FA 2008 and the treatment for investment life assurance contracts (includes capital redemption products) was replaced by Schedule 13 of that Act (see also section 36 FA 2008) and then incorporated into sections 560 to 569 Corporation Tax Act 2009.
Such policies (contracts) were deemed to be loan relationships with effect from accounting periods beginning on or after 1 April 2008. Exemption from tax on non- trading profits in respect of loan relationships is available under section 486 CTA 2010 (previously section 505(1)(c)(ii) ICTA 1988) provided the income is applied to charitable purposes only.
VI.6.2 But if the policy was taken out on or after 17 March 1998, or taken out before 17 March 1998 and 'enhanced' after that date, the gain may be chargeable to Income Tax on the charitable trust if it is not possible to tax the assignor or donor because he or she:
A policy is treated as 'enhanced' if it is changed so as to increase the benefits secured or to extend its term.
VI.7.1 If the insurance policy was taken out before 17 March 1998 and has not been enhanced since that date, the charity is probably not taxable on any gain arising. Strictly, anybody who has ever made a donation to the charity and is still alive and resident in the UK is taxable on a fraction of the gain proportionate to the amount that they donated. Any donor liable to tax at higher rate is entitled to reclaim any tax they pay from the trustees of the charity. There are obvious practical difficulties for donors who will not know that there is a gain that they need to self assess.
VI.7.2 If the policy was taken out on or after 17 March 1998, or was taken out before 17 March 1998 but has been enhanced since that date, strictly, anybody who has ever made a donation to the charity and is still alive and resident in the UK, is taxable on a fraction of the gain proportionate to the amount that they donated. Any donor liable to tax at higher rate is entitled to reclaim any tax they pay from the trustees of the charity. Any share of the gain attributable to a donor, who has died or is not resident in the UK, is taxable as income of the trustees of the charity. There are obvious practical difficulties for donors and trustees to ascertain how much of the gain they should self assess.
Insurance policy assigned to charitable trust or taken out by the trust – Chargeable event on or after 9 April 2003
VI.7.3 All gains treated as arising on life insurance policies, which are owned by a charitable trust, are treated as forming part of the income of the trustees for the year of assessment in which the gain arose. This is the case whether or not the policy or premium has an identifiable donor.
Tax payable on gains by charitable trusts when gain is treated as forming part of the income of the trustees
VI.8.1 Tax on partial withdrawals that fall below the 5 per cent threshold set by section 507 ITTOIA 2005 (section 546 ICTA 1988 up to and including 2004-05) is deferred until the policy comes to an end when the withdrawals will be taken into account as relevant capital payments.
VI.8.2 Charitable trustees are exceptionally liable to tax on the gains they make from insurance policies at the rate applicable to trusts (34 per cent for the 2002-03 and 2003-04 tax years). If the gain arises from a:
VI.8.3 Charitable trustees are liable to tax on the gains they make from insurance policies at the basic rate (the lower rate from 2005-06 to 2007-08 inclusive) – see section 467(7) ITTOIA 2005. If the gain arises from a:
1. Gains treated as Case VI income of companies under Section 547(1)(b) are specifically excluded by Section 46(2)(b) Finance Act 2000 from the general Case VI of Schedule D exemption available under Section 46 FA 2000.