HMRC looks to restrict relief on life insurance policy gains

HM Revenue and Customs is consulting on new plans to limit the amount of tax relief it provides for gains made on certain life insurance policies relating to time spent outside of the UK, with new proposals limiting this to the beneficial owner of the policy alone.

Under current rules, anyone with a life insurance policy with an invested element that was issued by a non-UK insurer does not have to pay tax on any gains made on their policy during any period that they were not resident in the UK.

These rules currently apply to the policyholder - the legal owner of the policy - rather than the beneficial owner of rights under the policy, which in many cases can be a different person. Under new rules only the residence history of the person entitled to benefits under the policy would be taken into account.

HMRC also states that it is looking to amend the rules to take account of when premiums are paid, as it argues current rules effectively mean that top-up premiums paid while an individual is resident in the UK are often treated as having occurred when the policy was first issued.

While the above proposals are likely to restrict the amount of tax relief on gains, HMRC states in the paper that it is also proposing to extend the scope of the rules to include policies issued in the UK.

HMRC says the effect of this approach is to “give relief on an amount that may be greater than the proportion of the gains that accrued during the period of non-residence”, which it claims is “widely marketed as a tax advantage”.