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Premium limitation on qualifying life policies and restricted relief qualifying policies – part 3

Technical Article

In the first article in this series we explained that, in broad terms, the main changes to the extent in which a person could benefit from personal freedom from income tax under the qualifying policy rules are as follows:

  • The total premiums payable by one individual on all “new” qualifying policies must not, from 6 April 2013, exceed £3,600 in a 12-month period;
  • For these purposes a “new” qualifying policy is one taken out:
  • after 5 April 2013 (unless it is an excluded policy); or
  • between 21 March 2012 and 5 April 2013 (the transitional period) – but the new rules only apply to premiums paid after 5 April 2013; or
  • before 21 March 2012 (known as protected policies) but only if those policies are varied after 20 March 2012 and become restricted relief qualifying policies because they cause the £3,600 annual limit to be exceeded.

In the second article we looked at policies which fall within categories (i) and (iii) above.  In this third article we consider policies falling within category (ii) above.  These policies are those issued on or after 21 March 2012 and before 6 April 2013.  The period 21 March 2012 to 5 April 2013 is a transitional period running from the date the £3,600 annual premium limit was announced to the day before it came into force.  Only premiums paid from 6 April 2013 count for the £3,600 test in respect of such policies.

 

BACKGROUND

Premiums that could be paid into qualifying policies before 6 April 2013 were unlimited in amount. From that date the total premiums payable by one individual, subject to various exceptions, have been restricted to £3,600 per annum if the whole gain under a qualifying policy is to attract no personal income tax whatsoever.

Where total annual premiums paid by an individual exceed £3,600 per annum then a policy may be rendered non-qualifying, which means there is no freedom from personal income tax on the benefits, or freedom from personal income tax is restricted to only part of any gain. Such restricted policies are termed “restricted relief qualifying policies”.

THE TREATMENT OF TRANSITIONAL PERIOD POLICIES

a) Transitional period policies where the premiums exceed £3,600

If a qualifying policy is issued in the transitional period (21 March 2012 to 5 April 2013) and the premiums payable under that policy exceed the annual premium limit of £3,600, which applies from 6 April 2013, that policy will be a restricted relief qualifying policy (RRQP).

When a policy is classified as a RRQP this means the full value of the benefits payable in respect of the period from commencement of the policy up to and including 5 April 2013 will be free from personal income tax. Any premiums payable from 6 April 2013 onwards will be taken into account for ascertaining an individual’s annual premium limit.

The individual’s allowable premiums in respect of that RRQP will therefore be restricted to a maximum of £3,600 per annum with effect from 6 April 2013, or whatever shortfall in the limit exists once the individual’s other qualifying policies (which existed at the time the policy became a RRQP) are taken into account. 

 

Example - Anna

Anna took out a qualifying policy on 30 June 2012 with annual premiums payable of £5,000. 

As the premiums exceeded the £3,600 annual limit, the policy will be a RRQP.  Full relief from personal income tax will be available on the deemed benefits secured by the premiums paid from 30 June 2012 until 5 April 2013 – even though these exceed the £3,600 limit.

However, from 6 April 2013 relief from personal income tax on benefits will only be available in respect of up to £3,600 of premiums payable per annum. Also, Anna cannot take out any more qualifying policies because her annual premium limit is fully taken up by the qualifying policy she took out on 30 June 2012.

Let’s assume that Anna’s policy matures for £75,000 on 31 May 2022. 

At that time there will be a deemed chargeable event gain of £25,000 ie. £75,000 less £50,000 premiums paid.

It is first necessary to determine the premiums that can secure benefits with relief from personal income tax. These will be the £5,000 premium paid before 6 April 2013 and then 9 premiums of £3,600 paid after 5 April 2013. In total this comes to £37,400.

As the total premiums paid are £50,000 this will mean that the benefits that will be subject to tax as a chargeable event gain will equal:       £12,600 (unrelieved premiums)

£50,000 x £25,000 = £6,300.

 

b) Transitional period policies where premiums do not exceed the annual premium limit of £3,600

If a qualifying policy is issued in the transitional period and the premiums payable under that policy do not exceed the annual premium limit of £3,600, the premiums payable under the policy will still count towards the individual’s annual premium limit in the period from 6 April 2013. Benefits from the policy will, however, be tax free.

 

Example – Claudia

Claudia takes out a policy on 30 June 2012 (policy 1) with annual premiums payable of £2,500. This is a qualifying policy. In June 2018 Claudia takes out another policy (policy 2) of which she is the sole beneficial owner and that meets all the current requirements for a qualifying policy. This policy has annual premiums of £500. 

The aggregate of her premiums is £2,500 plus £500 equals £3,000 per annum. This policy is therefore also a qualifying policy because the aggregate premiums payable do not exceed the £3,600 limit.

In September 2018 Claudia takes out a further policy (policy 3) of which she is the sole beneficial owner and that meets in isolation all the current requirements for a qualifying policy (but see next paragraph). Annual premiums under this policy are £1,000. 

Claudia must consider her existing premiums under her 30 June 2012 qualifying policy and the qualifying policy effected in June 2018, in addition to the September 2018 policy, to establish whether her latest policy is a qualifying policy.  Her premiums are £2,500 plus £500 plus £1,000 equals £4,000 in total.

  • Policy 1 taken out after 20 March 2012 but before 6 April 2013 - £2,500 pa.
  • Policy 2 taken out after 5 April 2013 - £500 pa.
  • Policy 3 taken out after 5 April 2013 - £1,000 pa.

Claudia’s premiums now exceed the £3,600 annual limit. As such the policy issued in September 2018 cannot be a qualifying policy as the £3,600 limit has been exceeded. Therefore, it is a non-qualifying policy and, as a consequence, any gain on maturity of this policy will be subject to income tax.  However, the two earlier policies retain their qualifying policy status.

If Claudia had taken out a policy in September 2018 with annual premiums payable of £600 instead of £1,000 then this would have used the available balance for the annual premium limit and so would have been a qualifying policy. 

 

c) More than one policy in the transitional period

i) Transitional period policies where annual individual policy premiums do not exceed £3,600 but collectively they do

If more than one qualifying policy is issued in the transitional period and the premiums payable under each policy do not exceed the annual premium limit of £3,600, each of the policies will attract full freedom from personal income tax for benefits attributable to premiums payable in respect of the period before 6 April 2013.  However, each policy will count toward the individual’s annual premium limit in the period from 6 April 2013. Any later policy that, when aggregated with earlier policies issued in the transitional period, first results in the annual premium limit of £3,600 being breached will be a RRQP as will any subsequent policies issued in the transitional period.

 

Example – Simon

Simon takes out 5 qualifying policies, each with an annual premium of £1,100, as follows:

  • 9 April 2012
  • 10 April 2012
  • 11 April 2012
  • 12 April 2012
  • 13 April 2012

Under all of the policies benefits attributable to premiums paid before 6 April 2013 will be free from personal income tax. From 6 April 2013 only benefits attributable to the premiums shown below will be free of income tax:

  • policy effected on 9 April 2012 – full £1,100 premium
  • policy effected on 10 April 2012 – full £1,100 premium
  • policy effected on 11 April 2012 – full £1,100 premium
  • policy effected on 12 April 2012 – £300 of premiums
  • policy effected on 13 April 2012 – no relief

ii) Policies issued in the transitional period where premiums under each policy exceed the annual premium limit of £3,600

If more than one qualifying policy was issued in the transitional period and the premiums payable under each policy exceeded the annual premium limit of £3,600, which applies from 6 April 2013, the benefits from each of the policies will attract full relief from personal income tax for premiums payable in respect of the period from which they are taken out to 5 April 2013.

Each policy will be a RRQP and premiums payable under the policy will count towards the individual’s annual premium limit in the period from 6 April 2013 and will be considered by reference to the date they were taken out, commencing with the earliest.

 

Example - Melissa

Melissa takes out 5 qualifying policies as follows:

  • 30 March 2012
  • 31 March 2012
  • 1 April 2012
  • 2 April 2012
  • 3 April 2012

Each policy has annual premiums payable of £3,600

Relief from personal income tax on the benefits payable is available in full on the premiums paid under each of the policies for the period from which they are taken out until 5 April 2013.

 

From 6 April 2013 relief will be available in respect of the benefits paid from the premiums set out below as follows:

 

Policy 

Premium

30 March 2012

£3,600

31 March 2012

£Nil

1 April 2012

£Nil

2 April 2012

£Nil

3 April 2012

£Nil

                                               

The policy effected on 30 March 2012 will be a qualifying policy.  The 4 policies taken out on and after 31 March 2012 will be RRQPs. This is because Melissa has used up all of her annual premium limit of £3,600 on the policy issued on 30 March 2012 which means the available balance is nil.

When the earliest policy (30 March 2012) matures, the 31 March 2012 policy will attract relief on benefits related to premiums of £3,600 from the date of the first policy’s maturity and so on.

ii) Transitional period policies which are significantly modified before 6 April 2013 with a resulting annual premium in excess of £3,600 per annum

If a qualifying policy has been issued in the transitional period and the premiums payable under that policy did not exceed the annual premium limit of £3,600 but that policy is then subject to a significant modification (see below) before 6 April 2013 and, as a result of that modification, the annual premium limit is exceeded, that policy will then be a RRQP. 

This means that benefits in respect of premiums paid before 6 April 2013 will be free from personal income tax but premiums paid after that date will count towards the £3,600 annual limit.

A significant modification to a policy is basically a variation of a policy such as to increase or potentially increase the period over which premiums are payable or the total premiums payable in any twelve-month period beginning at the time of the variation (or to increase both of these).

d) The assignment of transitional period policies after 5 April 2013

The assignment of a qualifying policy before 6 April 2013 will not result in a change of status of that policy.

However, if a qualifying policy is assigned to somebody else on or after 6 April 2013, the policy will automatically become non-qualifying unless it is an excluded assignment.  An excluded assignment is:

  • an assignment as part of a divorce settlement or dissolution of a civil partnership
  • an assignment as a result of a court order
  • an assignment as security for a debt or discharge of a debt
  • an assignment between husband and wife and between civil partners
  • an assignment into or out of a trust
  • assignments to the personal representatives of a deceased individual or as a result of a deceased beneficiary event (see (e) below).

 

The implications of making an excluded assignment after 5 April 2013

Whether the excluded assignment of a qualifying policy after 5 April 2013 will have an impact on the taxation of the proceeds of that policy will depend on the type of assignment that occurs.

The following assignments, which we refer to as “exempted” assignments, have no impact on a policy’s qualifying status:

  • Assignments as a security for a debt or on discharge of a debt.
  • Assignments as part of a legally enforceable obligation relating to a divorce or dissolution of a civil partnership if the policy assigned is to pay off an interest-only mortgage.
  • Assignments to personal representatives of a deceased individual.
  • Assignments following the death of an individual if the beneficiary was already a beneficiary prior to death.

 

In all other cases, where a qualifying policy is assigned after 5 April 2013 the assignee must aggregate the premiums paid under the assigned policy with all of their other qualifying policies that are subject to the annual premium limit rules. This will include all premiums payable in respect of existing qualifying policies issued after 5 April 2013 and any RRQPs. 

If the premiums payable under the assigned policy, when aggregated with the assignee’s other relevant qualifying policies (ie. policies issued after 5 April 2013 or RRQPs), do not cause the assignee to breach the annual premium limit of £3,600, the assigned policy will remain a qualifying policy in the hands of the assignee.

However, if the premiums payable under the assigned policy when aggregated with the assignee’s other qualifying policies cause the assignee to exceed the annual premium limit of £3,600 the status of the assigned policy will change.  If the assigned policy was a qualifying policy issued on or after 21 March 2012 but before 6 April 2013 (ie. a transitional period policy), it will become non-qualifying.

 

 e) Deceased beneficiary event

Under the general rule a deceased beneficiary event occurs if, in connection with the death of one individual beneficiary, another individual who was not a beneficiary becomes a beneficiary under the policy. When the policy rights pass to the new beneficiary the annual premium limit will then be tested in respect of that new beneficiary.

A qualifying policy (whether a RRQP or not) issued on or after 21 March 2012 and before 6 April 2013 becomes a non-qualifying policy where, following a deceased beneficiary event on or after 6 April 2013, the new beneficiary is in breach of the premium limit.

In the next and final article in this series we will consider the effect of a policy becoming a RRQP and the requirement to notify HMRC of certain transactions.