Annex 1: Minor changes in the law made by the Act: Change 97: Gains from contracts for life insurance etc: clarification of entitlement to credit for income tax at the lower rate in the case of certain foreign life insurance policies: section 531(5)
This change clarifies the interpretation of section 553A(3) of ICTA, making it clear that an individual who is chargeable on gains from certain foreign life insurance policies is treated as having paid income tax at the lower rate under section 547(5) of ICTA.
Under section 547(1)(a) of ICTA a gain treated as arising on a chargeable event may be treated as part of an individual’s total income. Section 547(5) of ICTA provides that the individual is treated as having paid income tax at the lower rate on the amount so treated. This is subject to some complex exceptions which deny the relief to certain foreign contracts and policies.
Section 547(6) of ICTA denies the benefit of section 547(5) of ICTA to certain life annuity contracts except where section 547(6A) and (7) of ICTA apply. (The exception in section 547(6A) of ICTA is not relevant here.) Section 547(7) of ICTA disapplies section 547(5) of ICTA for gains in connection with policies issued by a friendly society in the course of tax exempt life or endowment business, except so far as calculating top slicing relief under section 550 of ICTA is concerned.
Section 553 of ICTA makes provision about certain foreign policies. Section 553(6) of ICTA denies the benefit of section 547(5) of ICTA to new non-resident policies and new offshore capital redemption policies subject to similar exceptions to those that apply to section 547(6) of ICTA. (The exception in section 553(6A) of ICTA corresponds to that in section 547(6A) of ICTA and is not relevant here.) Section 553(7) of ICTA disapplies section 553(6) of ICTA where a new non-resident policy meets the conditions in paragraph 24(3) of Schedule 15 to ICTA (policies which are part of the insurer’s UK taxed business).
Section 553A of ICTA makes provision about a further class of “foreign policy” (policies issued as part of the overseas life assurance business of a UK insurer). Section 553A(1) of ICTA provides that these are treated as if they were new non-resident policies, and so they would come within the terms of section 553(7) of ICTA if they met the conditions in paragraph 24(3) of Schedule 15 to ICTA. But section 553A(3) of ICTA provides that section 553(7) of ICTA does not apply to gains arising on new non-resident policies.
However, the intention was that section 553A(3) of ICTA should only apply to policies treated as new non-resident policies under section 553A(1) of ICTA and in practice that is how it is interpreted. Otherwise, section 553(7) of ICTA would be otiose.
Section 553(7) of ICTA is rewritten in section 531 so that it continues to apply to foreign policies of life insurance (see section 531(3)), other than those which meet the conditions in section 531(5) and (6). Section 531(5) refers to policies within paragraph (a) of the definition of a “foreign policy of life insurance” in section 476(3) of this Act. Policies that are foreign policies by virtue of section 553A of ICTA are covered by paragraph (b) of that definition and so they are excluded.
This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.