Annex 1: Minor changes in the law made by the Act: Change 89: Gains from contracts for life insurance etc: disregard of alteration of terms of old life insurance policies where insurer stops collecting premiums: sections 488 and 489
This change gives statutory effect to part of ESC A96.
Alterations in the terms of a life insurance policy may simply have the effect of varying the terms of the policy or they may result in the replacement of the policy. The result of varying the terms or replacing the policy may be that a charge to tax will arise on later events, such as the surrender or maturity of the policy, which would not otherwise have arisen. For example, this could occur because after the alteration the policy is no longer a qualifying policy, as defined in Schedule 15 to ICTA. (Qualifying policies are normally outside the chargeable event gains regime in Chapter 2 of Part 13 of ICTA.) It could also occur because the alteration causes a policy which was entirely outside the chargeable event regime or particular provisions of it to be brought within it. For instance, this could happen where the policy commenced before 20 March 1968 (the date of introduction of the chargeable event gains regime).
ESC A96 is concerned with a particular sort of alteration in terms of policies. It is sometimes uneconomical for insurers to collect premiums on old policies because of the small sums involved. If they agree to stop collecting such premiums, that may be an alteration in the terms of the policies. But ESC A96 provides that, for the purposes of the chargeable event gains regime in Chapter 2 of Part 13 of ICTA, an alteration in the terms of a life insurance policy should be ignored if it results from a decision by an insurer to stop collecting premiums on a number of policies of the same description because it is no longer economically viable to do so. ESC A96 only applies where the policy was issued at least twenty years before the alteration and the alteration is not itself a chargeable event. (ESC A96 also provides for such alterations to be ignored for the purposes of Schedule 15 to ICTA (qualifying policies).)
Sections 488 and 489 give statutory effect to the concession so far as they provide that such alterations are ignored for the purposes of determining whether a chargeable event has occurred in relation to a policy or contract.
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.