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Life insurance policies

Time apportionment (non-resident) relief

We have recently received a few enquiries with regard to the application of time-apportionment relief (also referred to as 'non-resident relief'), with particular reference to UK life policies and the effect that certain transactions under policies can have on the relief.  In this article we provide an overview of the position.

INTRODUCTION

In broad terms, when a policyholder has enjoyed a period of tax residence outside the UK a chargeable event gain can be reduced to reflect this period of non-UK residence. This relief is known as time-apportionment/non-resident relief.

The general rule is that all offshore policies (policies issued by a non-UK resident insurer) issued after 17 November 1983 are eligible for time-apportionment relief.  Until 6 April 2013 time-apportionment relief was only available for offshore policies but from 6 April 2013 time-apportionment relief was made available to new UK policies (and, in certain circumstances, pre 6 April 2013 UK policies which have been varied or assigned on or after 6 April 2013 (see below for more detail on this).

TIMESCALES

In considering the application of time-apportionment relief, 3 time frames can be identified as follows, in chronological order;

Pre 18 November 1983 offshore policies

Time-apportionment relief is not available for

a) Offshore life policies issued before 18.11.1983; and

b) Offshore capital redemption policies issued before 23 February 1984

Although time-apportionment relief is not available a 20% basic rate tax credit is available for such policies.

Pre-6 April 2013 offshore policies which do not fall within above

  • Time apportionment relief is available for policies which have been varied so as to increase the benefits payable or extend the term on or after 17.11.1983 or 22.2.1984 as appropriate.
  • Time-apportionment relief is also available where such a policy has been varied so as to increase the benefits payable or has been assigned on or after 6.4.2013 - see below - time-apportionment relief is calculated on the basis the policy is treated as issued from 6 April 2013.

Offshore and UK policies issued or treated as issued from 6 April 2013

Policies qualifying for time-apportionment relief falling within this time frame arealllife assurance polices and capital redemption policies, regardless of the country (which includes the UK) from which they have been issued, provided:

(i) The policy was issued after 5 April 2013; or

(ii) The policy was issued before 6 April 2013 and on or after 5 April 2013 

  1. it is varied so as to increase the benefits payable (which includes being varied by exercise of an option conferred in the policy); or
  2. there is or was an assignment, by way of gift or for consideration, of the whole or part of the rights under the policy to the individual liable for the tax, or the deceased in cases where personal representatives or trustees are liable for tax on a gain which had arisen to the deceased.  Assignment here includes an assignment into or out of trust; or
  3. the whole or part of the rights under the policy become held as security for a debt of the individual or the deceased (see 2 above).

The main rules to be satisfied for this time-apportionment reduction to apply are that:

1. The liability for the payment of tax on the chargeable event gain must fall on an individual or the personal representatives or trustees of a deceased individual. 

The circumstances under which an individual can be liable for tax on a chargeable event gain are:

  • the individual beneficially owns the rights under the policy- section 465(2) ITTOIA 2005; or
  • the rights are held on non-charitable trusts which the individual created ie. they are the settlor of the trust of the policy - section 465(3) ITTOIA 2005; or
  • the rights are held as security for a debt of the individual - section 465(4) ITTOIA 2005

The circumstances under which the personal representatives of a deceased individual can be liable for the payment of tax on a chargeable event gain are set down in section 466 ITTOIA 2005.  This will basically be when a chargeable event occurs before the administration of an estate has been completed because at that time the personal representatives hold the rights in the policy.

The circumstances in which trustees can be liable for tax on behalf of a deceased individual arise under section 528A(2) ITTOIA 2005 when

  • the policy is held subject to a non-charitable trust
  • the settlor has died in an earlier tax year. 

When the settlor dies in the tax year in which the chargeable event occurs, the settlor will be the individual liable for tax on the gain. 

2. There were one or more days in the 'material interest period' during which the individual or deceased individual, as the case may be, was not UK resident.  The 'material interest period' is the period during which the policy had been in force before the chargeable event in which one or more of the conditions in 1 above were satisfied.

SUMMARY

  • All policies issued on or after 6 April 2013 are capable of qualifying for time- apportionment relief.
  • All policies issued before 6 April 2013 can qualify for time-apportionment relief, but under the rules as they apply from 6 April 2013, if
    • The policy is varied on or after 6 April 2013 so as to increase the benefits payable; or
    • There has been an assignment of the whole or part of the rights under a policy, with or without consideration, to the individual or deceased individual; or
    • There has been assignment of the rights under the policy as security for the debt of the individual or deceased individual

CALCULATION OF THE RELIEF

The way relief is calculated depends on whether the policy is subject to the pre 6 April 2013 or post 5 April 2013 rules.  The calculation rules are briefly as follows:-

(i) Offshore policies issued before 6 April 2013 that remain subject to the pre 6 April 2013 rules

Where a policy holder (legal owner) was resident in the UK for only part of the period during which the policy was in force, chargeable event gains are apportioned to the period of residence in the UK.  This means that gains chargeable to tax are reduced by the 'appropriate fraction of the gain'.

The appropriate fraction is styled A/B where:

A is the period of residence of the policyholder outside the UK whilst the policy is in force in days

B is the total period the policy has been in force in days

It should be noted from the fraction that the period of non-UK residence is calculated by reference to the residence history of the policyholder (legal owner) throughout the duration of the policy.  This rule is less stringent, and therefore more favourable, than the rule for policies issued or treated as issued after 5 April 2013 when the residence test is based on the residence history of the individual liable for income tax on the chargeable event gain- see (ii) below. 

(ii) Policies subject to the post 5 April 2013 rules

The chargeable event can be reduced by a fraction to reflect the number of daysthe individual liable for payment of income taxwas not UK tax resident throughout the period that the policy was in force.

The fraction A/B, to calculate the amount by which the chargeable event gain is reduced, is:

A - the number of days in the material interest period (see above) which are non-UK resident days - in the legislation they are termed 'foreign' days

B - the total number of days in the material interest period.

For example, if a policy that has been owned by a non-UK resident for, say, 15 years is assigned to an individual who has never been non-UK resident then there would be no entitlement to non-resident relief when the assignee encashes the policy. 

CONCLUSION

Despite the tightening of the rules on time-apportionment relief from 6 April 2013, such relief is still very valuable.  Clients who are resident outside the UK, or who plan to take up residence outside the UK, would be best advised to keep a note of their residence history in case an opportunity to claim time-apportionment relief presents itself.

It pays to consider all of the circumstances of a case carefully when time-apportionment relief is relevant, particularly if a change in ownership of a policy is planned. In other situations it may be beneficial for a policy to be treated as effected after 5 April 2013, for example a UK policy issued before 6 April 2013.