Anti-avoidance measure regarding life insurance policies

Draft legislation and draft explanatory statement

These notes include, supplement and explain the details of the draft legislation

The Financial Secretary to the Treasury has announced that legislation will be introduced in the forthcoming Finance Bill to prevent tax avoidance by individuals through the creation of income tax loss relief from offshore life insurance policies.
This note provides an explanatory commentary and sets out the background to the changes.

Details

  1. The change announced today affects the operation of sections 152 and 153 of the Income Tax Act 2007.
  2. Gains from offshore life insurance policies are taxed as income under special rules which may give rise to a tax charge when certain chargeable events, such as the surrender, assignment and maturity of a policy, take place. These rules apply income tax to gains when they arise but do not provide relief for income tax losses should the calculation from a chargeable event give a negative result.
  3. Section 152 and 153 Income Tax Act 2007 provide that certain types of miscellaneous income (including offshore income gains) may attract tax relief for income tax losses. Avoidance schemes identified by HMRC purport to create loss relief from offshore life insurance policies which can be set off against offshore income gains.
  4. The new measure will remove the scope for income tax loss relief to be created from offshore policies and will put beyond any doubt the Government’s long standing view that income tax loss relief is not available.

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Draft Explanatory Statement

Subsection (1) amends section 152(8) of Income Tax Act 2007 (ITA). This ensures that gains from policies and contracts falling within section 531(3) Income Tax (Trading and Other Income) Act 2005 (certain life insurance policies, offshore capital redemption policies and contracts for life annuities) will not be eligible income for the purposes of claiming income tax loss relief under section 152(1) ITA.

Subsection (2) provides that subsection (1) will apply to losses relating to the years 2009/10 onwards. This means that there is no scope to claim income tax loss relief for any losses relating to 2009/10 and subsequent years.

Subsection (3) provides that in certain circumstances, subsection (1) will also apply for 2008/09 so there is similarly no scope to claim income tax loss relief;

  • in relation to new policies or contracts made on or after 1st April 2009, or
  • for policies or contracts varied on or after 1st April 2009 so as to increase the benefits secured. For this purpose, the exercise of an option in the policy or contract, on or after 1st April 2009, is treated as a variation.
  • where all or part of the rights are assigned on or after 1st April 2009 to the person claiming a deduction, or
  • where all or part of the rights conferred by the policy or contract become held, on or after 1st April 2009, as security for a debt.

Subsection (4) provides that where claims for income tax loss relief relating to 2008/09 or an earlier tax year have been made and part of those losses remain unused in 2009/10 or subsequent years, there will be no deduction available under section 153 ITA for the unused losses in 2009/10 or subsequent years.