Annex 1: Minor changes in the law made by the Act: Change 90: Gains from contracts for life insurance etc: allowing the deduction of gains previously charged on related policies to be made in calculating later gains: section 491(5)
This change enables gains charged on an earlier chargeable event in respect of a policy of life insurance to be deducted in calculating the gains from a later chargeable event in respect of a related policy.
Section 541 of ICTA provides the rules for computing chargeable event gains on policies of life insurance and is expressed in section 541(1) of ICTA to apply to “any policy of life insurance”, which is referred to later as “the policy”.
Section 541(1) of ICTA provides that premiums previously paid under the policy are deductible in calculating chargeable event gains. Section 541(5)(b) of ICTA provides that in relation to premiums references to “the policy” include references to “any related policy, that is to say, to any policy in relation to which the policy is a new policy within the meaning of paragraph 17 of Schedule 15 to ICTA, and any policy in relation to which that policy is such a policy, and so on”. (Under Schedule 15 to ICTA a “new policy” is created when one policy is issued in substitution for or on the maturity of another policy by way of an option conferred by the other policy.) So section 541(5)(b) of ICTA ensures that premiums paid in respect of one policy are allowed as a deduction in computing the gain on the second or later policy to which the first policy is related.
Section 541(1) of ICTA also allows the amount treated as a gain on the happening of previous chargeable events in relation to a policy to be deducted in calculating the chargeable event gains in respect of the policy. But section 541(5)(b) of ICTA only deals with the deduction of premiums in respect of related policies and does not make any corresponding provision about such gains on the happening of previous chargeable events in respect of related policies. This appears to have been an oversight and, in practice, gains in respect of related policies are deducted from a final gain on a second or later policy.
Section 491 gives effect to this practice by providing in subsection (2) that “PG” (defined as any gains on a previous calculation event in relation to the policy or contract) are to be deducted in calculating the gains, and then providing in subsection (5) that the reference to the policy in the definition of “PG” includes related policies, as defined in subsection (6).
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.