Life Insurance - Qualifying Policies

On 18 June a Consultation Paper was published on this topic. The intention is to limit to £3600pa the premiums for new ‘qualifying policies’ taken out from 6 April 2013 by any individual, if the maturity proceeds are to qualify for tax free status. The tax relief may also not apply if the beneficial owner of a policy is not an individual – eg it has been placed in a Trust from which the settlor has been excluded as a beneficiary.

The Government seems to see this as another way of restricting tax reliefs which have been unlimited since 1968. While it did a U-turn recently on charity donations, it is less likely to back down on this initiative.

Qualifying policies are basically regular premium life policies which run for 10 years or more, and have an investment element, such as endowments or whole life with profits. Term policies which pay a fixed sum if you die within a fixed period of years, but have no investment value, are also usually ‘qualifying’.

Since the special tax regime for qualifying policies was introduced in 1968, it has given them important advantages for tax planning, and IHT in particular when written in Trust.

This may have a significant effect on some traditional IHT planning arrangements. For example many policies were taken out in the 1970s -1990s and placed in Trust to build up a fund to meet IHT on the death of the survivor of a married couple. Back to back annuities were another example. These may be less popular nowadays as investment returns on traditional policies have declined with interest rates, but they still have a place in tax planning.

While policies taken out before 21 March 2012 will not be affected, there are transitional arrangements for policies taken out from 21 March 2012 to “forestall” people who try to take advantage of the old rules before the new ones are clear.

As has happened in the past when changes have been made to tax rules affecting policies, the tax status of existing ones will not be affected as long as their terms are not changed beyond the exercise of contractual rights within the policy terms.

Until the new rules are clearer it is strongly recommended not to change the terms of pre-21 March 2012 policies, or perhaps the trusts under which they are held.

For more detail click here to see HMRC Technical Note 630.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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