IPTM1300 - Development of policyholder taxation: historical

Policy originally focused on tax relief for payments of life assurance premiums, life assurance being regarded as a Good Thing, rather than on taxing gains. But this was before life assurance was developed as an investment medium along with its protection element.

Life assurance premium relief was part of the original income tax code introduced by William Pitt, the Younger, in 1799 to help fund the Napoleonic Wars. The code was largely recast by Addington in 1803 when familiar concepts such as deduction of tax at source and the schedular system were introduced. Income tax was abolished in 1816, following the defeat of Napoleon, but reintroduced by Sir Robert Peel in 1842, as he inherited both a growing budget deficit and a healthy parliamentary majority.

Gladstone, in a famous near 5 hour budget speech in 1853 made significant changes to the code of what he called "Peel’s giant called forth from repose”, prompted in part by the need to raise funds for the Crimean War. It was section 54 of the 1853 Finance Act that reintroduced relief on life assurance premiums and payments to secure deferred annuities. That Act contains the restriction to one sixth of total income still on the statute book to this day, ICTA88/S274, see IPTM2130.

Relief for premium payments to life offices and friendly societies was statutory. Relief for the death benefit element of trade union subscriptions was extended by concession in 1916, recognising that the working classes were starting to be caught by a tax net widened to pay for the Great War. It was not made statutory until 1978.

In Finance Act 1916, and Income Tax Act 1918, rules were introduced governing the relationship between premiums and capital sum assured, but until 1968 the proceeds from life assurance policies were outside the tax regime in the hands of the policyholder. And such proceeds, in the hands of the original holder, were specifically exempted from capital gains tax when this was introduced in 1965.

The reliefs were important in the early days of PAYE, and described thus (taken from the 1948-49 form P3):

‘Life insurance

Subject to certain restrictions, an allowance is due for

1. premiums paid on your life or your wife’s life …
   
2. premiums paid in connection with certain superannuation or pension schemes
   
3. those parts of your contributions to a trade union or friendly society which are for death or superannuation benefits.’

Important restrictions were introduced by FA68. See IPTM1310.

FA76 laid the basis for life assurance premium relief by deduction, effective from 1979-80. This relief was abolished by FA84/S72, for policies made, or varied to increase the benefits or extend the term, after 13 March 1984, but the legislation covering the trade union, certain friendly society reliefs and compulsory purchase of deferred annuities, which were not given by deduction, survives. These reliefs are set out at IPTM2140, IPTM 2150 and IPTM2160. They are limited to small amounts and are not these days of great importance.

The provisions governing life assurance premium relief by deduction remain of considerable significance, and not only because the relief continues to run on old policies. This is because the legislation governing ’qualifying policies’ contained in ICTA88/S267 and ICTA88/SCH15 is employed in the ’chargeable events’ legislation introduced by FA68 as well as in determining whether a policy can attract premium relief.