Annex 1: Minor changes in the law made by the Act: Change 93: Gains from contracts for life insurance etc: treating taking a capital sum under a contract for a life annuity as a surrender of a part of the rights under the contract for all purposes: section 500
This change involves treating the taking of a capital sum under a contract for a life annuity as a surrender of part of the rights under the contract for all purposes of Chapter 2 of Part 13 of ICTA, and not just for sections 542 and 543 of ICTA.
Sections 542 and 543 of ICTA deal respectively with chargeable events in respect of life annuity contracts and the computation of gains in respect of such contracts. Under section 542(2) of ICTA, where a contract provides for the payment of a capital sum as an alternative to annuity payments, the taking of the capital sum is treated as a surrender in whole or part of the rights under the contract. Section 542(2) of ICTA is expressed as applying for the purposes of sections 542 and 543 of ICTA. But, in fact, it is section 546 of ICTA which deals with the calculations which have to be made to see if a gain has arisen on part surrenders or assignments, although section 542(1)(c) of ICTA refers to such calculations under section 546 of ICTA and lists an excess in such a calculation as a chargeable event for such contracts. Section 546(1) of ICTA is expressed to apply for the purposes of section 542 of ICTA. But the result is that it is not entirely clear whether the taking of a capital sum in these circumstances is a surrender for the purposes of section 546 of ICTA or the alternative regime for taxing excesses under section 546 of ICTA that now applies under sections 546B to 546D of ICTA.
In practice, the taking of a capital sum is treated as a surrender in whole or part of the rights under the contract for the purposes of the calculations under sections 546 and 546B to 546D of ICTA. Section 500(b) clarifies the position by providing that the taking of a capital sum is treated as a partial surrender for the purposes of the whole of Chapter 9 of Part 4 of this Act (which corresponds to Chapter 2 of Part 13 of ICTA). So it reflects current practice.
This change provides a clarification of the law. But it is expected to have no practical effect as it is in line with current practice.