HMRC reveals new limits on life insurance tax relief
Plans to restrict tax relief available for qualifying life insurance policies have been unveiled by HM Revenue & Customs.
Tax relief available for qualifying life insurance policies will be limited to no more than £3,600 in any 12-month period.
HM Revenue & Customs has revealed rules to take effect for qualifying life insurance policies issued on or after 6 April 2013 and transitional rules will apply for policies issued from 21 March 2012 to 5 April 2013 inclusive.
The qualifying policy (QP) regime was introduced in 1968 at the same time as the special rules for applying income tax to investment gains realised by policyholders from life insurance policies.
The regime meant for both qualifying and non-qualifying policies, corporation tax at a special rate of 20 per cent applies to investment returns accruing in the hands of insurers and friendly societies.
The effect of the QP regime was that gains are exempt from income tax in the hands of policyholders bar certain situations (for example where a policy is surrendered less than 10 years from the date of issue).
There has been no upper limit on the investment premiums payable into a QP allowing individuals to obtain unlimited relief from higher rates of income tax.
In a 24-page consultation paper issued last week, the government stated it was aware that QPs have been increasingly marketed to those impacted by other policy changes, including the restrictions on tax reliefs for pension savings through registered pension schemes.
The government stated it decided to limit tax relief available on these policies as it does not believe it justifiable or affordable to offer unlimited income tax relief in the current savings and fiscal climate.
According to the consultation paper, the amount of premiums that can be paid into a QP for an individual will be limited to £3,600 in any 12-month period, for QPs issued on or after 6 April 2013.
Transitional measures were also announced with effect for policies sold on or after 21 March 2012 (Budget Day), so as to prevent forestalling.
The premium limit should be applied to premiums due and payable in any period of 12 months rather than to premiums actually paid in set periods.
The limit will apply to premiums payable throughout the life of a policy. Variable premium policies will be non-qualifying from the outset if premiums payable will exceed £3,600 in any 12-month period.
Policies with premium reviews will also cease to be qualifying if, on review, the premiums payable in any 12-month period are increased so that they exceed £3,600.
Premiums payable under policies issued on or after 21 March 2012 and before 6 April 2013 will count towards the premium limit for policies issued on or after 6 April 2013.
In certain cases, premiums payable under policies issued before 21 March 2012 may also count towards the limit for policies issued on or after 6 April 2013.